SinoInsight 1
April 21
Sheng Songcheng, the former director of the People’s Bank of China’s Investigation and Statistics Department and the dean of the China Chief Economist Forum Research Institute, published an analysis article titled, “Recommendation to Appropriately Delay the Deleveraging Cycle of the Real Estate Industry” (建議適當延⻓房地產行業去槓桿週期).
Sheng wrote that the sudden coronavirus outbreaks represent a “new blow” to China’s real estate industry, which has already hit rock-bottom. He then recommended that the deleveraging cycle be “appropriately delayed” without a change in deleveraging policy objectives, including making “appropriate adjustments” to the “three red lines” policy and property loan concentration assessment requirements, to buy time for the real estate industry to respond to the epidemic.
Sheng added that there should be “high vigilance” to the vicious cycle formed by the cash flow crisis of real estate companies. “Currently, the cash flow crisis in the real estate industry is persisting, and the risks facing leading property developers are persisting,” he wrote. “The maturing of a large number of U.S. dollar-denominated bonds in the second quarter has become a risk point.”
April 21
State media Securities Daily reported A-share listed companies still have nine days to disclose their annual reports for 2021 as of April 21 before the deadline. According to financial information service provider Wind, 66 listed real estate companies have yet to release their 2021 annual report, including those in the “100 billion yuan camp” that previously announced debt defaults.
Securities Daily also reported that nine Hong Kong-listed real estate firms have not released their audited annual reports after the disclosure deadline had passed, including top developers like China Evergrande, Sunac China, and Shimao Group. Liang Nan, an analyst at Zhuge Zhaofang’s Housing Data Research Center, told Securities Daily, “From (examining) some of the Hong Kong real estate companies that failed to release their audited 2021 annual reports as scheduled, most of them are looking to rollover their debt or have already defaulted on their debt.”
April 22
Shanghai Shimao, a subsidiary of Shimao Group, released a plan to drag out the repayment of a private bond (“20 Shanghai Shimao PPN002”). Shanghai Shimao will make an initial repayment of 15 percent, roll over the remaining principal for a year, then make quarterly payments of 20 percent, 20 percent, 20 percent, and 25 percent.
Shanghai Shimao made 2.3 billion yuan in sales in the first quarter of 2022, a year-on-year decrease of 59 percent. Shimao Group ranked 13th in sales among Chinese real estate companies in 2021, with total sales of 269.89 billion yuan.
Foreign investment outflows and other financial troubles
April 17
Bloomberg News reported that Xi Jinping’s friendship with Russia’s Vladimir Putin and “zero-COVID” strategy is “turning China into a potential quagmire for global investors.”
The report noted that:
- Outflows from China’s stocks, bonds, and mutual funds “accelerated after Russia’s invasion of Ukraine, while Norway’s $1.3 trillion sovereign wealth fund has snubbed a Chinese sportswear giant due to concerns about human-rights abuses.”
- U.S. dollar private-equity funds that invest in China raised $1.4 billion in Q1 2022, the lowest since 2018 for the same period.
- Global funds sold more than $7 billion worth of mainland-listed stocks through exchange links with Hong Kong in March. They also sold $14 billion in PRC government debt over the past two months and trimmed their credit holdings.
- Bank of America’s most recent survey of investors found that betting against China was the fifth-most crowded trade.
- Investment professionals at an American private equity fund in Hong Kong are not “pursuing opportunities in China as aggressively as before even though prices are far lower.”
- U.K. investment firm Artemis Investment Management LLP sold all its China investments in 2021 after Beijing’s crackdown on Ant Group and Didi Global.
- Krane Funds Advisors LLC is “replacing U.S.-listed Chinese stocks with those trading in Hong Kong to reduce risk.”
1. The Shanghai Composite Index, the Shenzhen Component Index, and the ChiNext Index all closed down by more than 2 percent. The Shanghai index fell 2.26 percent to 3,079.81 points; the Shenzhen index fell 2.70 to 11,084.28 points, and the ChiNext Index fell 2.17 percent to 2,312.46 points.
2. Yi Huiman, chairman of the China Securities Regulatory Commission, convened a symposium with principles of the National Council for Social Security Fund and some large banking and insurance institutions. The symposium proposed that pension, banking, and insurance institutions and various asset management institutions should further expand their proportion of equity investment.
Analysis: The central authorities are urging financial institutions to increase their stock holdings in a bid to rescue the markets.
April 22
1. PBoC governor Yi Gang delivered a keynote speech by video to a sub-forum on “global inflation, interest rate hikes, and economic stability” at the Boao Forum for Asia.
Yi said that the current international situation is “full of uncertainties” and global tensions are further exacerbating global inflationary pressures. He added that China’s financial markets have seen “some fluctuations” recently due to external shocks and internal factors such as the spread of the coronavirus epidemic, both of which are increasing downward pressure on the economy.
Yi added that the top priority of China’s monetary policy is maintaining price stability. He noted that financial services attach great importance to agricultural production, as well as the production and import of important energy resources such as coal, oil, and natural gas. Thus, ensuring stable grain output and energy supply will keep China’s inflation “within a reasonable range” this year, he said.
2. Wang Chunying, deputy director and spokesperson of the State Administration of Foreign Exchange, said at a press conference that the recent adjustment of cross-border securities investment is a natural market reaction to the complex international economic and financial situation.
“Net foreign capital outflows under bonds and equities fell by 39 percent and 44 percent respectively in late March when compared to mid-March, with the scale of outflows declining. Outflows further eased in April, and inflows have resumed on some trading days,” Wang said. She added that foreign institutions’ investment in Chinese securities will return to a steady state and long-term value investment is still a major consideration for foreign investors after the market digests some short-term factors and expectations.
Wang also said that China is capable of adapting to policy changes from the U.S. Federal Reserve and the renminbi will remain stable despite recent volatility.
3. Reuters reported that foreign investors sold a net $1.01 billion worth of Chinese equities for the month as of April 22, citing data from Refinitiv Eikon and the Hong Kong stock exchange. Foreign investors sold $17.7 billion worth of Chinese bonds through Hong Kong’s Bond Connect in March, the biggest outflow since August 2017. Data from China Central Depository & Clearing Co showed that foreign holdings of Chinese bonds totaled $3.57 billion at the end of March, the lowest in five months.
Meanwhile, mainland large and mid-cap stocks have fallen about 20 percent this year, which makes China’s stock markets the world’s worst performers after Russia’s.
4. The benchmark 10-year U.S. Treasury yield climbed to 2.974 percent, the highest since December 2018, before falling to 2.905 percent. The Sino-U.S. interest rate spread was negative 0.096 percent when the 10-year Treasury yield hit the high and China’s 10-year government bond yield hit 2.878 percent that day.
April 24
Some Chinese banks will cut deposit rate ceilings on April 25, according to a Reuters report, citing sources familiar with the matter. The Bank of China will cut rates for time deposits of 2-3 year tenors by about 10 basis points, and the Bank of Communications will make similar moves.
While it is unclear whether other state banks like the Industrial and Commercial Bank of China, China Construction Bank, and Agricultural Bank of China will cut deposit rates, sources told Reuters that state banks “typically move in tandem on rate moves.”
OUR TAKE
1. The plight of China’s real estate sector, recent government policies, and foreign capital outflows signal further worsening of the Chinese economy. The recent wave of outbreaks and the impact of the “zero-COVID” policy, as well as forthcoming U.S. interest rate increases, foreshadow a bleak second quarter and a very pessimistic annual outlook.
Worse for the CCP, its recent efforts to rescue the property sector and reverse the trend toward recession are not working.
2. Beijing began relaxing real estate financing restrictions from November 2021 as leading property developers defaulted on their debt one after the other. In the first quarter of 2022, banks approved more than 210 billion yuan in bond issuance plans and bank credit lines pertaining to real estate project mergers and acquisitions. The 23 policy initiatives announced by the PBoC and the State Administration of Foreign Exchange on April 18 also contained property sector-specific measures like requiring financial institutions to distinguish between project risks and the risks of real estate companies; increase support for high-quality projects (i.e. China Evergrande has debt problems, but financial institutions should still lend to the company’s more promising projects); not blindly withdraw, cut off, or shrink loans to property companies; not engage in “one-size-fits-all” approaches, and maintain stable and orderly distribution of real estate development loans.
The authorities’ effort to stimulate sales and stabilize the property sector, however, has not managed to arrest the trend of deterioration. Prominent real estate developers like Shanghai Shimao have to drag out repayments, and listed companies are struggling to issue their annual reports. The National Bureau of Statistics data for national real estate development and sales from January to March 2022 also contained multiple indicators of weakness. In particular, sales of commercial buildings continued to log declines, with residential sales in March recording the largest decrease since July 2021. Real estate companies saw their funds decrease by nearly 20 percent year-on-year during the first quarter. Property sector data is set to look even uglier in the second quarter because the March figures do not completely capture the impact of lockdowns that came into force near the end of the month.
Sheng Songcheng’s article recommending that the deleveraging cycle of the real estate sector be “appropriately delayed” is another sign that government policy is failing to turn the situation around. Sheng’s warning about a “vicious cycle” and “cash flow crisis” echo our own when we analyzed the introduction of the “three red lines” back in August 2020. We also noted then that the “inability of Chinese real estate companies to refinance their debt” due to policy restrictions will lead to “large-scale defaults and trigger systemic risks in China’s property and financial sector.” Recent COVID-19 outbreaks and prolonged adherence to “zero-COVID” will only worsen the real estate sector debt crisis.
3. China’s real estate sector troubles will affect local government revenue and restrict the CCP authorities’ ability to advance infrastructure construction to stimulate the economy.
The CCP regime continues to rely on infrastructure investment to stimulate growth amid falling consumption during the pandemic and declining export growth. In the first quarter of 2022, the national fixed asset investment (excluding rural areas) increased 9.3 percent year-on-year to 10.4872 trillion yuan. Of the total, private investment in fixed assets increased 8.4 percent year-on-year to 5.9622 trillion yuan, and state investment increased 11.7 percent year-on-year to 4.5250 trillion yuan. Infrastructure investment (excluding electricity, heat, gas, and water production and supply) increased 8.5 percent year-on-year.
Meanwhile, the central government is urging local governments to issue bonds in advance of infrastructure construction to boost the economy. Data from the finance ministry showed that provincial governments cumulatively issued about 1.25 trillion yuan of local government special bonds by the end of March 2022, or 86 percent of the pre-release quota.
Infrastructure investment, however, requires money. Local governments are reliant on land sales to fund infrastructure investment; local government real estate-related revenue totaled 10.4 trillion yuan in 2020, or 53 percent of total local government fiscal revenue. Local governments also need to sell land to make debt repayments. However, local government revenue from land sales is taking a hit from declining real estate sales. National government fund budget revenue in the first quarter of 2022 fell 25.6 percent from a year ago to 1.3842 trillion yuan, while government expenditure increased 43 percent to 2.4787 trillion yuan, leaving a deficit of 1.0945 trillion yuan.
The ability of local governments to spend on infrastructure and stimulate the economy will be further reduced in the second quarter. For one, the implementation of strict “zero-COVID” policies in many areas is bringing local economies to a standstill, affecting tax revenue and consuming government funds (mass testing; subsidies; food, supplies, and logistical support, etc.). Beijing’s epidemic prevention policy also affects property sales, which will in turn impact real estate companies facing huge debt maturities; property developers have $31 billion in debts due in the second quarter of 2022 and $117 billion (of which $36 billion are dollar-denominated) for the whole year, according to Refinitiv data.
4. The deterioration of China’s economy will amplify the impact of “spillover risks” and create a vicious cycle that will be difficult to reverse in the short term.
PRC officials have been talking up China’s “investability,” downplaying capital outflows, and stressing currency stability. The PBoC also released the equivalent of 1.13 trillion yuan in liquidity last week by cutting banks’ reserve requirement ratios and paying profits to the central government.
However, the inversion of U.S. and Chinese government-bond yields has clearly led to capital outflows and is offsetting some of Beijing’s monetary easing. According to ChinaBond data, foreign institutions began reducing their holdings of Chinese bonds in February and March this year by 164.752 billion yuan, with a net reduction of 114.663 billion yuan in the first quarter. This sharply contrasts with the net increase of 252.322 billion yuan in the first quarter of 2021.
Capital outflows are also reflected in the devaluation of the renminbi. The onshore RMB exchange rate hit a 2022 high of 6.303 to the dollar on Feb. 28 before falling to a low of 6.505 on April 22. The yuan is set to depreciate further when the Fed raises interest rates in May and continues to shrink its balance sheet. RMB depreciation will also accelerate the speed of capital outflows, and push up the price of importing commodities such as energy and grain.
China’s plunging stock markets also show the sluggishness of the economy. At the beginning of 2022, there were 4,684 listed companies on the Shanghai and Shenzhen stock exchanges with a total market value of 99.06 trillion yuan. As of April 21, the total market value of those companies was 80.83 trillion yuan. The evaporation of 18.23 trillion yuan in value meant that the roughly 199 million investors (as of January 2022) in those securities markets lost an average of 91,700 yuan per investor so far this year.
SinoInsight 2
April 19
1. Yang Wanming (age 58), former PRC ambassador to Brazil, was promoted to deputy director of the Hong Kong and Macau Affairs Office of the State Council.
2. Meng Fanli (57), former deputy Party secretary of the Inner Mongolia Autonomous Region and Party secretary of Baotou City, was transferred to Guangdong to serve as provincial deputy Party secretary and Shenzhen Party secretary. Meng succeeded former Shenzhen Party boss Wang Weizhong, who was promoted to acting governor of Guangdong at the end of December 2021 and was officially appointed governor in January 2022.
April 20
1. Ying Yong (65), former Hubei Party secretary, was appointed vice chairman of the National People’s Congress’s Constitution and Law Committee.
2. Chen Run’er (65), former Ningxia Party secretary, was appointed vice chairman of the NPC’s Agriculture and Rural Committee.
3. Wang Jianjun (64), former Qinghai Party secretary, was appointed vice chairman of the NPC’s Social Construction Committee.
April 22
1. Wang Xiaohui (60), former Central Propaganda Department executive deputy director, was promoted to Sichuan Party secretary. Wang replaced the retiring Peng Qinghua (65).
2. Ni Yuefeng (58), former General Administration of Customs director, was promoted to Hebei Party secretary. Ni replaced Wang Dongfeng (64), who is approaching retirement age.
3. Liu Guiping (62), PBoC vice governor and vice chairman of the National Committee of Chinese Financial Workers’ Union, was transferred to Tianjin and promoted to serve as Tianjin deputy mayor and Party Committee Standing Committee member.
OUR TAKE
The recent raft of vice-ministerial rank personnel deployments is part of Xi Jinping’s effort to prime officials for key positions ahead of the 20th Party Congress key personnel reshuffle. The recent deployments are basically in line with the “rules” of reshuffling that Xi has observed over the past decade.
The appointment of Ying Yong, Chen Run’er, and Wang Jianjun as NPC committee vice chairmen trends in the direction of our previous analysis. We noted that these officials would join either the NPC or the National Committee of the Chinese People’s Political Consultative Conference as vice chairmen. Whether their careers progress further depends on the extent of Xi Jinping’s grip on power at the 20th Party Congress and the 2023 Two Sessions.
Retiring Sichuan Party boss Peng Qinghua is a Jiang faction official. If Peng avoids being purged, he could move to the “second line” (退去二綫) with a position in either the NPC or the National Committee of the CPPCC.
New Hebei Party secretary Ni Yuefeng is a technocrat. He served in the NPC’s Environment and Resources Protection Committee for many years (March 2003 to February 2011), eventually becoming the committee’s vice chairman. Ni was then transferred to Fujian to serve as vice governor (February 2011 to June 2013); per CCP organization protocols, the provincial posting is meant for Ni to gain experience in preparation to take higher office in the future.
Ni would continue to climb the ranks after Xi took office and looked to elevate officials without strong Jiang faction background. In June 2013, Ni Yuefeng joined the Standing Committee of the Fujian provincial Party Committee and served as provincial Commission for Discipline Inspection head. Three years later, he was transferred to Fuzhou to serve as Party boss (August 2016 to May 2017). In May 2017, he was promoted to ministerial-rank and transferred to the General Administration of Customs to first serve as deputy director, and then director.
Meng Fanli, the new Shenzhen Party boss, looks on track to have a bright career. A Ph.D. in economics and a former college lecturer, Meng spent the bulk of his official career in Shandong Province. He formerly headed the Shandong provincial finance department, department of commerce, and Shandong Lucion Investment Group (an investment and financing entity and asset management platform under the Shandong government). He also served as mayor of Yantai City and Qingdao City in Shandong.
Meng’s familiarity with economic work appears to be a factor in his appointment to Shenzhen. Another factor could be his involvement in anti-corruption “20-year retroactive investigations” in Inner Mongolia.
Tianjin deputy mayor Liu Guiping also has a Ph.D. in economics and is familiar with finance. Barring unforeseen circumstances, Liu will be promoted to executive vice mayor.
Wang Xiaohui, the new Sichuan Party secretary, worked in the Central Propaganda Department for many years (2009 to April 2022). After the 18th Party Congress, Wang served as deputy director of the Central Policy Research Office (2014 to 2018), then under the leadership of current Politburo Standing Committee member Wang Huning (October 2002 to October 2020). Following the implementation of Party and state institutional reform in 2018, Wang Xiaohui concurrently served as head of the China Film Association and director of the Central Commission for Guiding Cultural and Ethical Progress. Wang Xiaohui’s career marks him as a political client of Wang Huning.
New HKMAO deputy director Yang Wanming has no prior experience in the Hong Kong and Macau apparatus. Until his recent appointment, Yang was a diplomatic official handling South American affairs, and previously served as ambassador to Chile, Argentina, and Brazil between 2012 and 2022. Yang’s appointment to the HKMAO to replace one of two retired deputy directors is in line with Xi Jinping’s practice of using officials from outside the Hong Kong and Macau apparatus to curb the influence of the Jiang faction.
