SinoInsight 1
Property sector
1. On Feb. 11, Moody’s Investors Service downgraded Sunac China Holdings’ corporate family rating from Ba3 to B1, and the company’s senior unsecured rating from B1 to B2. Moody’s also changed its outlook on the ratings to negative from stable.
“The negative outlook reflects potential further weakening in the company’s operating and financial performance over the next 12-18 months amid a challenging operating environment,” Moody’s said. The ratings firm also noted that Sunac has $1.2 billion of offshore bonds maturing this year but the company has a low likelihood of refinancing the debt by issuing bonds at a reasonable cost over the next six to 12 months.
On Feb. 14, Sunac’s Hong Kong shares fell 9.7 percent in the premarket trade, bringing its year-to-date losses to 16 percent. Sunac ranked third in the list of top 200 Chinese real estate companies by sales in 2021 with sales of 567.72 billion yuan.
2. The Guangzhou Intermediate People’s Court ordered the freezing of about 1 billion yuan ($157 million) in assets of two subsidiaries of Evergrande Real Estate. Shanghai Construction sued an Evergrande unit in Chengdu for overdue construction fees, and Shanghai Construction Group sued an Evergrande unit in Jiangsu for overdue payments.
3. Mainland media reported on Feb. 15 that 62 of the 126 listed real estate companies in China had released their 2021 performance forecasts as of Feb. 14.
Data from financial information service provider Wind showed that more than 60 percent of the 62 companies saw net profit declines, with 11 out of 28 pre-loss companies suffering losses of more than 1 billion yuan.
4. The Beijing municipal government held its first batch of centralized land auctions for 2022 on Feb. 16. Of the 18 land parcels on sale, nine entered the on-site bidding process, eight were sold at reserve price, and one sale was aborted. The total land transaction price was 48 billion yuan, with an overall premium rate of 4.5 percent.
Beijing aside, Fuzhou, Hefei, and some other cities also announced the first batch of centralized land auctions for the year.
Ding Zuyu, CEO of E-House Enterprise Group, noted that the volume and price of land transactions in cities of all levels showed year-on-year and month-on-month declines despite the recent improvement in the policy environment, according to mainland media. He added that the land market in most cities is still cold, with some exceptions.
Ding also noted some real estate companies under debt repayment pressure have no money to buy land, meaning that the cautious “wait-and-see” attitude towards land purchases will be difficult to significantly reverse in the short term. Further, increased opportunities for real estate enterprises to undergo merger and acquisitions this year signals that the land market on the whole may not pick up quickly in 2022.
5. Chinese property developer Yango Group announced in the evening of Feb. 17 that it failed to make overdue interest payments on two dollar bonds (a $300 million bond and a $357 million bond) within the 30-day grace period (ending Feb. 15, 2022) for making repayments. The interest due totaled $27.3 million. The company has another bond ($22.76 million) due March 18.
This is the first time that Yango, which claimed a “temporary cash-flow issue” due to the macroeconomic environment for its failure to make the payments, materially defaulted on its overseas bonds since it ran into a debt crisis last year. Yango has eight outstanding U.S. dollar bonds totaling $2.218 billion, with the face value of the bonds falling from $1 to around $0.10.
On Jan. 29, Yango announced that its performance losses (net profit after non-recurring gains and losses) in 2021 will be in the range of 7.3 billion yuan to 8.6 billion yuan. Yango ranks 16th in the list of top 200 mainland property companies by sales in 2021 with sales of 161.75 billion yuan.
6. State media Securities Times reported on Feb. 18 many banks have issued M&A-themed bonds bonds this year. Financial institutions like Shanghai Pudong Development Bank, China Guangfa Bank, China Merchants Bank, and Ping An Bank have provided nearly 60 billion yuan in financing support for real estate company mergers and acquisitions.
7. Zhenro Properties, a Hong Kong-listed Chinese real estate company based in Fujian, announced in the evening of Feb. 18 that it may not have enough internal resources to make payments on debts due in March 2022, including perpetual bonds up for redemption on March 5.
Zhenro ranked 293 in Fortune’s China top 500 list in 2021.
8. The local government of Heze City in Shandong Province lowered the down payment ratio for so-called “no home, no loan” (無房無貸) home buyers from 30 percent to 20 percent, according to mainland media reports on Feb. 18. Chongqing City and Ganzhou City also lowered the down payment ratio for first home buyers to 20 percent around the Lunar New Year period.
Industry sources told mainland media that the cities carrying out the latest round of payment adjustments are not areas with restricted buying (限購). Rather, the adjustments were jointly decided on by local housing and financial departments in accordance with city-specific policies. Chen Wenjing, deputy research director of China Index Academy’s index division, believes that more cities may follow suit going forward, especially third- and fourth-tier cities with weak urban fundamentals and greater market adjustment pressure.
Per the PBoC’s February 2016 requirements, the minimum down payment ratio for first home purchases is 25 percent in non-restricted buying cities, with allowance of downward adjustments of up to five percentage points.
Real estate stocks in mainland and Hong Kong markets rose that day at the news of further efforts by local governments to stabilize the property market. The CSI 300 Real Estate Index grew 4.2 percent to lead the A-share market, and the Hang Seng index tracking mainland real estate stocks rose by 3.7 percent at the peak.
Finance
1. China Economic Weekly, a magazine managed by People’s Daily, published an article on Feb. 8 by chief commentator Niu Wenxiu titled, “Don’t Short Your Motherland—Tools Financiers Use to Get Rich Needs to be Re-evaluated” (不要“做空自己的祖國”—金融人發財的工具需要重新評價).
The article criticized financial predators (金融大鱷) for reaping the wealth of others in the market in the name of “professional competence” (financiers who issue various research reports and the media they control) and “risk diversification” (financiers who issue derivative products and their control over transactions). The article called for a high degree of vigilance against financial derivatives, noting, “This is not only a matter of protecting the real economy and the interests of the common people, but more importantly, it is a means of maintaining national financial security.”
Citing as an example the U.S. Justice Department’s collection of contact information from dozens of short-selling hedge funds and research institutions to investigate possible trading abuses, the article makes two points: First, Wall Street’s “financial viciousness” is “everywhere,” and China’s financial market cannot be turned into Wall Street. Second, the U.S. experience shows that efforts to “short one’s motherland” will never end well.
The article also noted that in the “era of oligopoly” where financier predators are “all-pervasive,” the “naivety” of assuming that “the market is the market, it rises and falls without intervention” is not desirable. Government supervisors must be aware of the situation so as not to be “passive and unprepared.”
2. On Feb. 13, Yicai Global reported two failed auctions of Zhongyuan Bank shares worth 180 million yuan. Later, the shares would be split into four tranches (50 million shares, 50 million shares, 40 million shares, and 40 million shares) and sold at 80 percent of the appraisal price.
A senior industry practitioner told Yicai that the Zhongyuan shares would unlikely be sold considering the price unless investors are willing to pay a premium given that the going price is higher than that in the secondary market.
Yicai wrote that failed auctions are becoming an obvious phenomenon in the current bank equity auction market, noting that nearly 60 percent of the 92 bank share auctions since February have failed.
3. Caijing published a report about how small- and medium-sized banks (一年“消失”20多家銀行, 4000家中小行路在何方) have been “disappearing” since 2020 after undergoing mergers and reorganizations. Citing publicly available data, the report noted that over 20 small- and medium-sized banks have completed or are going through mergers and reorganizations since 2020. Some of the banks were insolvent at the time of merger, according to Caijing.
The report said that the 4,000 small- and medium-sized banks’ nearly 80 trillion yuan in total assets account for about 28 percent of China’s entire banking system. The People’s Bank of China’s 2021 second-quarter rating results shows that there are about 400 high-risk small- and medium-sized banks, with assets accounting for 1.4 percent of the total. Regionally, these at-risk banks are concentrated in Liaoning, Gansu, Inner Mongolia, Henan, Shanxi, Jilin, and Heilongjiang.
Caijing said that a number of industry insiders revealed that the merging of high-risk small- and medium-sized banks is a measure to temporarily resolve the crisis. New institutions, however, will face long-term burdens if large amounts of non-performing assets are handled improperly.
4. CITIC Securities announced that it had signed a depository business with Hua Xia Bank and purchased three fixed-term deposits totaling 8 billion yuan, according to a Feb. 13 report by local state newspaper Chengdu Business Daily. CITIC Securities opted to receive principal-guaranteed returns at an estimated annualized return/deposit interest rate of 2.28 percent, and 36.6067 million yuan in total projected returns.
CITIC Securities raised about 22.4 billion yuan in A-share placements at the end of January, the largest share placement financing on record in the securities industry. Just a week earlier on Feb. 8, CITIC Securities had announced plans to put 8 billion yuan of temporarily idle funds into cash management.
OUR TAKE
1. The current state of China’s financial and real estate sectors affirms our pessimistic outlook of the Chinese economy (see here and here). As we noted in a recent newsletter, the increase in new bank loans and social financing in January is not due to improving macro trends or recovery, but rather a temporary phenomenon stemming from government policy.
2. The inability of large property companies to make payments on debt and defaults is indicative of spreading financial contagion from the Evergrande debt crisis. Slower land sales are also the result of growing malaise in the property sector.
The PRC government has been loosening financing and supporting state-owned real estate enterprises (nearly 60 billion yuan) in acquiring projects from troubled real estate enterprises to alleviate the industry’s debt problem. Such measures may not be sufficient to resolve the debt crisis given the looming state of affairs. 2022 is a peak period for maturing real estate company debt (about 356.02 billion yuan in total; see here and here), yet property developers saw sales fall sharply in January. Poor sales likely influenced third and fourth-tier cities to lower the down payment ratio for first-time home buyers.
Weak sales will greatly challenge real estate companies who are already struggling to make debt repayments, and increase the probability of defaults this year. This will in turn lead to increasing financing costs and reduced financing capacity of property companies (see here), further deepening the debt crisis.
3. Financial contagion in the property sector appears to be affecting the financial industry, and in particular, the small- and medium-sized banks that previously relied on issuing high-yield real estate loans. While the PRC government has sought to delay the triggering of risks through the merging of small- and medium-sized banks, the financial sector may find it difficult to digest their non-performing assets as the economy heads towards recession.
Meanwhile, CITIC Securities’ allocation of more than 35 percent of newly raised funds (22.4 billion yuan) to buy bank deposits for arbitrage indicates that large financial institutions are finding it difficult to find projects to invest in at the moment. Financial risks will continue to expand and become harder to resolve as economic headwinds grow stronger in China.
4. The CCP appears to be getting more concerned about “major risks with spillovers” as March looms and the U.S. Federal Reserve gets closer to raising rates. China Economic Weekly’s call for investors to refrain from “shorting your motherland” is both a warning and a sign of worry; Beijing is afraid that those partaking in the so-called “disorderly expansion of capital” will take advantage of the coming “spillover” to make a run on the Chinese economy for their own benefit.
Things look even grimmer for the Chinese economy in considering how politics in a Party Congress year could shape the business environment. On the one hand, Xi Jinping needs to keep opening up the financial sector to improve the economy and keep China attractive to foreign investors. On the other hand, Xi will invariably be forced to clamp down on the financial sector when he moves against factional rivals, Party elites, and other interest groups responsible for the “disorderly expansion of capital.” The resulting tense and restrictive environment makes things harder for business and will negatively impact the economy. The intertwining of economic and political crises will result in a death spiral and create favorable conditions for the emergence of political Black Swans in China.
Businesses, investors, and governments should recognize that China’s economic problems are downstream from political problems, and factional struggle in the Party elite is the key political problem in the CCP today. As long as no faction gains a decisive advantage in factional struggle, China’s economic crisis is set to become even more complicated and unstable, and particularly so with growing global financial turmoil.
SinoInsight 2
1. Yuan Hongbing, an Australian-based Chinese dissident and jurist with insider knowledge of the chatter and developments in the CCP elite, laid out Xi Jinping’s current political predicaments in an interview with the Chinese-language edition of The Epoch Times.
Yuan said Xi previously had to accommodate the interests of various groups in the Party and seek compromises when he made changes to the Party and state constitutions (adding “Xi Jinping Thought” and scrapping term limits for the presidency) at the 19th Party Congress and the 2018 Two Sessions. However, Xi has little room for compromise at the 20th Party Congress because many Party interest groups are against him serving a third term in office.
Yuan said that there are three groups of anti-Xi forces in the Party elite. The first group consists of the princelings, who originally supported Xi but now oppose him because the latter is not sharing power with them and has hurt all their interests. The second group is made up of those who endorse Deng Xiaoping’s “reform and opening up” and the CCP elite’s core control over the market. The third group is composed of corrupt officials who “make a fortune while keeping a low profile (悶聲發大財)” during Jiang Zemin and the Jiang faction’s nearly two decades in power (including the Hu-Wen era). The presence of anti-Xi forces means that the outcome of the 20th Party Congress is “still subject to changes,” according to Yuan.
Yuan believes that Xi Jinping and the anti-Xi forces have their respective strengths. Xi is in power and wields the regime apparatus, including propaganda and organization. However, the anti-Xi forces have an advantage in controlling public opinion. Yuan cites a Party insider as saying that the CCP officialdom is presently mounting a “potential public opinion offensive” where “scolding Xi” (罵習) has gone vogue. “Although [officials] do not have the ability to publicly express their hatred of Xi on the domestic internet or in the newspapers, expressing anger and dissatisfaction at Xi has become an extremely popular phenomenon at private gatherings,” Yuan said.
Yuan believes that the recent “Fang Zhou” article reflects the ongoing bitter struggle within the Party, and anticipates counterattacks from the anti-Xi forces. He added that the “Fang Zhou” article is likely written by someone in the CCP system, and is an effort by the anti-Xi forces to use “external” voices to influence affairs on the mainland.
Yuan said that Party officials are joking amongst themselves that they are enacting “peaceful, rational, non-violent” (和理非; a reference to Hong Kong protesters) struggle against Xi Jinping, or in other words, “laying flat” (躺平). “This specifically manifests as administrative negligence. CCP officials are now the largest domestic ‘laying flat’ clan,” he added. Yuan noted that virtually all officials had “laid flat” on the Xuzhou chained woman case, resulting in the case becoming an international scandal for the CCP regime. “Didn’t Xi say that he is in charge of everything? Then he should personally handle [the Xuzhou case]. If Xi doesn’t give the word, then no one is in charge of the matter,” Yuan said. “This illustrates Xi’s current dilemma in China.”
Yuan Hongbing also noted that Xi’s criteria of selecting officials loyal to him for key positions at the 20th Party Congress will present him with another headache. “The so-called loyalists include those who climbed the ranks by fawning over and flattering Xi; these are two-faced people who are essentially loyal only to their interests. So-called allies of Xi could also betray him at any time, and this is Xi’s dilemma,” Yuan said.
2. Singaporean Chinese-language newspaper Lianhe Zaobao published an opinion piece by Liang Xingguo, an associate professor at the Shanghai University of Finance and Economics School of Law, titled “Term Limits: An Important Institutional Basis for Republics” (任期制: 共和國重要的製度基礎).
Liang laid out the institutional design and concept of republics before observing that some countries with the word “republic” in their name do not conform to the ideal, and vice versa. He added that state power is the people’s basic consensus of a republic, and state power “cannot be monopolized by a certain person or group for a long time.” Also, leadership tenure (including term limits) is an important institutional basis of a republic because “all under heaven is not the world of a single man, but the world of all people in the world” (天下非一人之天下, 乃天下之天人也).
In concluding, Liang criticized the leaders of some republics for failing to abide by term limits despite there being laws on the books. “As a result, the leaders served a second term, and then a third term … Although the country is still a republic in name, in reality it has become a dictatorial society,” Liang wrote.
Chinese observers widely believe that Liang Xingguo’s piece is aimed at Xi Jinping and his third term ambitions.
OUR TAKE
1. Yuan Hongbing’s observations and insider information largely track with our analysis of the factional struggle in the CCP elite and Xi Jinping’s many political problems. For instance, the three groups that Yuan identified as opposing Xi correspond to those in the “anti-Xi coalition” (Jiang faction, Deng supporters, princelings, etc.) that we previously analyzed as being responsible for recent works criticizing Xi, including the Duowei series on Deng Xiaoping’s Southern Tour and the Fang Zhou article.
Yuan’s remarks about how Xi has little room for compromise with Party interest groups also accords with our observation that the latter has been showing greater determination since the Sixth Plenum of the 19th Central Committee to purge factional rivals and others who stand in his way of a third term bid. Put another way, if “intra-Party democracy” is working for Xi and he has great support within the CCP elite, he would not need to openly intimidate the officialdom by doubling down on “self-revolution” and the anti-corruption campaign before the 20th Party Congress. Xi also would not need to attempt to align himself with the common people against the elite through policies like “common prosperity” and the targeting of the entertainment industry.
Yuan’s revelation that CCP officials are “laying flat” against Xi corresponds with our observations. We have long noted that Xi’s governance is plagued by officials’ inaction and procrastination (不作爲), as well as the often self-destructive “prefer left rather than right” (寧左勿右) and “one-size-fits-all” (一刀切) approach to implementing Xi’s orders.
Finally, Yuan’s analysis of the strengths of Xi validates our analysis that the latter lacks “quan wei” (authority and prestige) despite holding many titles and having consolidated power to a high degree. We have also said on numerous occasions that Xi’s “quan wei” deficit and negligible political achievements outside the anti-corruption campaign, coupled with pushback from the “anti-Xi coalition,” mean that his bid for a third term at the 20th Party Congress is not a done deal.
2. Liang Xingguo’s article is in line with the growing body of anti-Xi literature issued by opponents of Xi Jinping. It is noteworthy that Liang’s piece appeared in Lianhe Zaobao, which is known to lean pro-Beijing.
Given Yuan Hongbing’s insider information about how CCP officials are preparing a “public opinion offensive” to “scold Xi,” we can expect more articles with either an overt or subtle anti-Xi bias to appear in foreign media and websites in the lead up to the 20th Party Congress.
3. The intensification of factional struggle in the CCP elite will substantially raise political risk levels in China. Depending on the severity of intra-Party strife, how high the anti-corruption campaign reaches, and whether or not the various factions decide to “go nuclear” on each other’s negative political legacies, we do not rule out the possibility of there not even being a 20th Party Congress.
Businesses, investors, and governments need to prepare contingencies for political Black Swans in China this year.
