SinoInsight 1
Targeting statistical fraud
May 30
The PRC National Bureau of Statistics (NBS) held a video conference on the mobilization and deployment of special rectification work to deal with the problem of “runaway statistical falsification.” The meeting was attended by NBS director Kang Yi, Central Commission for Discipline Inspection Standing Committee member Cui Peng, National Development and Reform Commission discipline inspection and supervision group leader Sun Huaixin, as well as anti-corruption officials and statistics bureau officials from the various provinces, autonomous regions, and municipalities.
Kang Yi and Cui Peng both gave speeches at the conference.
Kang Yi said that statistical falsification is the “biggest form of corruption in the sphere of statistics” and inflicts the most harm on the public credibility of governmental figures. He added that statistical falsification is ongoing in some areas “without stopping and without restraint.” Kang said that officials should recognize the “long-term, complex, arduous battle against the falsification,” take the matter seriously, and struggle against falsification with “with real knives and real guns.”
Cui Peng said that officials should pay attention to officials who carry out administrative interference in data and statistics “without stopping and without restrain,” officials who covertly implement various statistical falsification, and officials who ineffectively hold to account those who carry out fraud. Such behavior must be “corrected and managed,” he said.
Cui added that efforts should be made to solve “stubborn diseases” such as power interference, “data rent-seeking,” and lax law enforcement. He said that those who instigate or allow statistics departments and relevant personnel to falsify data should be severely dealt with.
Penalizing financial institutions
May 31
The China Banking and Insurance Regulatory Commission (CBIRC) issued its fifth list of shareholders who committed major violations of laws and regulations. The 43 shareholders on the list include 14 individuals and 39 legal entities. Banks formed the bulk of shareholding financial institutions found to be in violation, and included the Liaoning Xingcheng Rural Commercial Bank, Liaoning Huanren Rural Commercial Bank, and Hohhot Ruyi Mengyin Rural Bank. Some trust companies, insurance companies, and financial leasing companies were also involved, including Minsheng Trust, Asia-Pacific Property & Casualty Insurance, and Tianjin Guotai Financial Rent.
Nineteen of the 43 guilty shareholders are connected with four banks in Liaoning Province, namely, Xingcheng Rural Commercial Bank, Huanren Rural Commercial Bank, Wafangdian Changxing Rural Bank, and Kuandian Rural Commercial Bank.
The CBIRC noted that the major violations and regulations committed by the shareholders in the list fall in the following 10 categories:
- Source of funds used in equity participation does not comply with regulatory requirements.
- Illegal holding of shares in banks and insurance institutions.
- Concealment of affiliation.
- Illegal transactions between related parties.
- Serious debt evasion behavior.
- Misappropriation or occupation of funds in violation of regulations by shareholders and related parties.
- Illegal pledging of equity holdings for financing.
- Illegally arranging for persons who have not been approved for employment to perform the actual duties of directors and officials.
- Refusal to make rectifications in accordance with regulatory opinions.
- Criminal acts involving triad and pernicious elements (涉黑涉惡).
Of the 10 categories, the fifth and eighth were being disclosed for the first time.
June 2
The CBIRC’s public administrative penalty information disclosure list showed for the first time that wealth management companies were being punished. Four companies were hit with fines, including Bank of China Wealth Management (fined 4.6 million yuan), Bank of China (fined 4.3 million yuan), Everbright Wealth Management (fined 4.3 million yuan) and Everbright Bank (fined 4 million yuan).
Financial sector purges
May 24
1. Duan Huiquan (age 64, removed from post and retired in May 2018), former deputy Party secretary and vice president of the Kunming central sub-branch of the People’s Bank of China, was investigated.
2. Liu Ying (58, female), Party Committee member and vice president of the Guiyang central sub-branch of the People’s Bank of China, was investigated.
May 31
Lin Zhiyong (59), a specially-appointed expert and former president of the People’s Insurance Company of China, was investigated.
June 2
Wang Zongcheng (57), former director of the China Securities Regulatory Commission accounting department, was investigated.
June 4
Jiang Yulin (64), former Party secretary and president of the Yunnan branch of the Industrial and Commercial Bank of China, was investigated.
OUR TAKE
1. The NBS’s fierce call to struggle against statistical falsification “with real knives and real guns” hints at the severity of the data fraud problem in the CCP regime and its impact on the Xi leadership’s drive to rescue the economy. If the central government is receiving mostly padded or outright false data from local governments, then Beijing cannot make accurate, effective, and timely adjustments to its policies to turn things around. The CCP regime is headed for very serious trouble and even a “Berlin Wall moment” should Beijing fail to swiftly address the local government statistical falsification problem and apply the appropriate fixes.
Note that the central government solving its local government data fraud problem does not mean that CCP official statistics will suddenly become more reliable. Beijing wants accurate data from the localities for its internal consumption, not to benefit external parties. This means that the NBS can be expected to “massage” and manipulate the official numbers before they are released.
2. The CCP has long been plagued by statistical falsification, and the Xi leadership is now having to pick up the tab for the problems stemming from it. Perhaps the most notable example is the one-child policy. Decades of cooking the books by central and local family planning departments and associated government agencies meant that Beijing could not act on reversing the policy even when its drawbacks and problems were becoming evident as early as 2000. China’s demographic crisis was in full swing by the time the Xi leadership scrapped the one-child policy in 2016 and allowed couples to have three children in 2021.
The lax disciplinary environment during the Jiang-Hu era further entrenched the statistical falsification problem. Jiang Zemin’s “ruling the regime through corruption” (以貪治國) model saw local governments regularly announce GDP figures that exceeded those issued by the NBS by more than 10 percent. Data from local governments were so unreliable that Li Keqiang ended up using railway cargo volume, electricity consumption, and loans disbursed by banks (the so-called “Keqiang Index”) to gauge the actual GDP when he was Liaoning Party secretary in 2007.
Hu Jintao and Wen Jiabao were unable to tackle the statistical falsification problem and push through reforms when they were in power because the Jiang faction was dominant and they lacked political strength. To avoid becoming like Hu and Wen, Xi Jinping launched an anti-corruption campaign and consolidated power to a high degree over two terms in office. Despite being more powerful than Hu, Xi still struggled to push through reforms due to factional struggle, the CCP’s bureaucratic culture, and other internal and external factors. We elaborated on this in analyzing Xi’s effort to “accelerate” the construction of a “unified national market.”
As with his economic reforms, Xi also struggled to address statistical falsification over the years even though it was part of his anti-corruption campaign while Big Data and other technological advances were used to aid in supervision. For example, state mouthpiece Xinhua reported on Dec. 10, 2015 that a central inspection team found that the three northeastern provinces (Heilongjiang, Jilin, Liaoning) had a problem with GDP “data padding” (數據注水). The figures provided by the local governments of those provinces showed that some of their towns and counties saw economic growth at a scale exceeding that of Hong Kong, an inconceivable phenomenon.
In May 2015, Xi Jinping appointed Chen Qiufa, a technocat who spent nearly four decades in the aerospace apparatus (Oct. 1978 to July 1998; July 2010 to Jan. 2013) and the science, technology, and industry for national defense apparatus (July 1998 to Jan. 2013), to serve as governor of Liaoning. The subsequent “discovery” of data fraud in Liaoning indicated that Chen had been doing his job. In January 2017, Chen noted in Liaoning’s government work report that statistical fraud accounted for nearly 20 percent of the province’s official fiscal revenue from 2011 to 2014. In particular, 2014 saw inflated revenue growth of 23 percent, the highest in the aforementioned period.
In May 2017, the Xi leadership issued regulations on statistics (中華人民共和國統計法實施條例) that clarified the responsibilities of local governments in preventing and punishing statistical fraud. The regulations came into effect on Aug. 1, 2017. On June 26, 2017, the central government also issued a plan for a “unified accounting of regional GDP” (地區生產總值統一核算改革方案), which stipulated that the NBS will be responsible for tallying up the GDPs of the various provinces, autonomous regions, and municipalities. The “unified accounting” is almost certainly aimed at preventing local government data falsification by getting the upper levels of the statistical apparatus to check the data provided by the lower levels.
The Xi leadership’s policies to combat statistical falsification in 2017 led some local governments to voluntarily admit to padding their numbers. At the end of 2017, the Inner Mongolia local government said that it had inflated its general public budget revenue and industrial output in 2016 by 53 billion yuan (26.3 percent of the total) and 290 billion yuan (40 percent of the total) respectively. Meanwhile, Tianjin Binhai New Area revised down its 2016 GDP by nearly a third, from over 1 trillion yuan to 665.4 billion yuan.
In July 2018, the central government issued regulations on preventing and punishing statistical falsification and fraudulent inspections (防範和懲治統計造假、弄虛作假督察工作規定). And from 2019, the NBS would set up over a dozen statistical inspection teams to carry out inspections across the country. Despite all these measures, the problem of statistical falsification remains a serious issue, leaving the NBS with no choice but to declare a struggle against statistical falsification “with real knives and real guns.”
3. As with fixing statistical falsification, the Xi leadership’s effort to rectify the financial sector is aimed at defusing the PRC’s financial risks and arresting China’s economic deterioration. Xi’s financial sector rectification is also partly aimed at cracking down on factional rivals and intimidating those who seek to undermine the Xi leadership through the financial sector. The recent purges and penalizing of financial institutions, however, suggest that Beijing still has a long way to go in resolving financial sector troubles and shoring up regime security.
The CBIRC’s targeting of shareholders could be linked to recent problems with rural banks in Henan Province. According to mainland media reports, the executives and shareholders of several rural banks were found to have colluded in setting up a fake system (using Baidu’s Du Xiaoman financial services, Xiaomi’s Tianxing Financial, and China Life’s Binhai Financial) that appeared to be in compliance with regulations to siphon away as much as 39.7 billion yuan from banks customers. As a result, the rural banks froze deposits around mid-April and drove bank customers to hold protests outside the various banks and even the Henan branch of the CBIRC. Publicly available information suggests that the Henan rural bank case could be a major risk incident in the history of China’s financial industry.
SinoInsight 2
Dismal property sales
June 1
Mainland real estate information provider CRIC released the following sales data for May and the first five months of the year.
May 2022
- The top 100 Chinese real estate companies achieved a monthly sales volume of 454.62 billion yuan, a decrease of 59.4 percent year-on-year (down 60.4 percent from the year-on-year change in April), and a month-on-month increase of 5.6 percent.
- The top 100 real estate companies achieved a monthly equity-caliber sales amount of 367.78 billion yuan, down 59.1 percent year-on-year (down 59.3 percent from the year-on-year change in April), and a month-on-month increase of 5.7 percent.
- Twenty-three of the top 40 real estate companies saw growth from a month ago, and just four companies saw growth from a year ago. Also, China Evergrande saw its growth drop 93.8 percent year-on-year in a single month.
First five months of 2022
- The top 100 real estate companies achieved cumulative sales of 2.32 trillion yuan, a decrease of 52.3 percent year-on-year.
- The top 100 real estate companies made equity-caliber sales of 1.71 trillion yuan, a decrease of 52.9 percent year-on-year.
- The top 100 real estate companies achieved 2.64 trillion yuan of full-caliber sales, down 52 percent year-on-year.
- Just three companies had sales exceeding 100 billion yuan (Country Garden, Vanke, Poly Real Estate), 12 fewer companies from the same period in 2021.
- Seventy housing companies had sales exceeding 10 billion yuan, 48 less from the same period in 2021.
Real estate debt crisis
May 30
Mainland property company Fantasia Holdings announced that it had received a liquidation petition from creditor Flower SPV4 Limited due to outstanding payment on a loan facility of $149 million. The petition, dated May 26, 2022 and submitted to the Cayman Islands Grand Court, seeks liquidation of shares and the appointment of joint liquidators. Fantasia noted that if it ends up being liquidated due to the petition, it cannot transfer its shares or change its shareholders after May 26 without the approval of the Grand Court, and that it “strongly opposes the petition.”
Fantasia is founded by Zeng Baobao, the niece of Jiang faction number two Zeng Qinghong. The company fell into a debt crisis when it officially defaulted on $206 million worth of dollar-denominated bonds in October 2021. Fantasia has yet to release its 2021 results and trading of its shares on the Hong Kong exchange has been suspended since April 1, 2022.
According to mainland media reports, Fantasia’s board chairman Pan Jun disclosed at the end of 2021 that Fantasia has nearly 26 billion yuan in offshore debt, over 6 billion yuan in domestic credit bonds, and more than 20 billion yuan worth of loans from domestic banks and financial institutions for a total debt scale of 52 billion yuan. Fantasia’s 2021 mid-term report noted that the company only had 27.18 billion yuan in bank deposits and cash equivalents at the time, of which 23.229 billion yuan are various restricted assets. Based on incomplete statistics, mainland media calculated that Fantasia had transferred over 4.56 billion yuan in assets since September 2021.
Fantasia’s contracted sales in 2019 were 36.2 billion yuan and it made the list of top 100 real estate companies in China for 12 consecutive years. Fantasia also ranked 51st in the China Index Academy’s top 100 real estate companies list in 2020, and was shortlisted in the top 10 in the categories of “robustness” and “financing capabilities.”
May 31
Mainland real estate company Yuzhou Group announced that it could not make payments on three offshore dollar-denominated bonds (at the maturity date and before the grace period was up) and one perpetual dollar-denominated bond due to a broken capital chain. Yuzhou said that the total scale of the defaults was $57.280 million.
Yuzhou Group had previously defaulted on some bonds, and has 13 dollar-denominated bonds worth $5.675 billion outstanding, of which $1 billion is due within a year. In 2021, Yuzhou’s cumulative sales amounted to 105.019 billion yuan and made just 1.283 billion yuan in profits.
June 2
Fitch Ratings announced that it will no longer provide ratings or analytical coverage for Evergrande and its subsidiaries because it has insufficient information to maintain ratings on the company.
In December 2021, Fitch downgraded Evergrande and its subsidiaries, Hengda Real Estate Group Co Ltd and Tianji Holding Ltd, to “restricted default” status after the companies defaulted on their offshore bond obligations.
SOEs to the rescue
May 31
According to The Wall Street Journal, Beijing has been encouraging state-owned real estate developers to “take a more active role” in the property sector since the outbreak of the real estate sector debt crisis last summer. For instance, regulators issued a directive in December 2021 encouraging healthy developers to take over good assets from their distressed private peers, and financial institutions have been asked to support such takeovers with loans and bond financing.
The Journal also cited NBS data as showing that developers’ land purchases have fallen 46.5 percent by area from a year ago in the first four months of 2022. Further, only eight of the top 20 developers that participated in land actions over those four months are not state-backed according to data from zhuge.com. Country Garden, the top participant in land auctions over the past two years, also fell out of the top 20.
June 1
1. Private real estate company Central China Real Estate (CCRE) announced that its controlling shareholder Enhui Investment will sell 29.01 percent of its equity to Henan Tongcheng Real Estate, an SOE under the Henan provincial government, at the price of HK$688 million. Henan Tongcheng will also buy HK$708 million worth of CCRE convertible bonds (coupon rate 5 percent, yield 9 percent) due in 2024.
CCRE’s full-caliber sales last year were 60.52 billion yuan according to CRIC data, placing it 58th on the latter’s 2021 real estate sales list. Also, CCRE’s equity-caliber sales were 45.36 billion yuan (54th on CRIC’s list), and its net profits decreased 40.4 percent year-on-year to 1.253 billion yuan.
According to incomplete statistics compiled by mainland media, SOEs in Beijing, Shanghai, Guangzhou, Shenzhen, Wuhan, Zhuhai, and several other areas have provided assistance to private real estate companies in danger since 2021. These companies include Evergrande, R&F Properties, Kaisa Group, Fantasia Holdings, and others.
2. The first round of centralized land supply auctions in Shanghai would be held from June 1 to June 8. According to mainland media reports, 36 plots of land are available in this round of auctions. Sixteen of the plots received just one bid and were sold at base price. Another four plots were auctioned off on the first day, and the 20 plots auctioned so far went for 49.578 billion yuan in total. Over 80 percent of the real estate companies that purchased the 20 plots are either SOEs or central-owned enterprises.
3. Beijing held its second round of land auctions in 2022, with 17 residential plots put up for auction and 14 bids finalized, according to mainland media. Of the 14 finalized auctions, seven were sold at base price and the other seven went for a premium. The seven land plots that were sold at a premium comprised a total construction area of 1.447 million square meters, amounted to 49.9575 billion yuan in total transaction value, and had an average premium rate of 5.45 percent.
Of the 30 real estate companies that participated in the auction, only three were private firms, while the rest were SOEs, COEs, and government urban investment real estate enterprises.
OUR TAKE
1. The CCP authorities have been unable to arrest the real estate sector’s downward momentum despite easing property restrictions since November 2021. This bodes ill for the regime as the property market is a key pillar of China’s economic growth, accounting for 6.8 percent of the GDP in 2021. According to an assessment by mainland financial institutions, China’s real estate investment activities, production activities, and indirect impacts accounted for about 20 percent of the GDP, about 40 percent of land fiscal revenue, about 20 percent of aggregate financing to the real economy, and about 60 percent of household assets.
The latest figures embody the gloomy situation. Although property sales figures in May improved from April, they were still down by nearly 60 percent when compared to last year. Additionally, SOEs accounted for more than 80 percent of real estate developers that participated in land auctions in important cities like Beijing and Shanghai, which indicates that private developers are struggling mightily with serious debt and liquidity problems. The poor sales situation will inevitably make it harder for Chinese developers to secure funding, which in turn increases the probability of further debt defaults and an expansion of the property sector debt crisis.
The debt situation is already depressing as it is. According to China Index Academy, real estate developers have $98.39 billion worth of offshore debt maturing in the second quarter of 2022. Data from Wind shows that 14 property companies defaulted on 26 dollar-denominated bonds worth $8.65 billion in 2021, the highest amount in five years. With real estate sales in the first five months of 2022 being less than half of what they were in 2021, developers will find it difficult to avoid further defaults.
We previously explained how local governments are dependent on land sales for revenue and noted the risk of vicious cycles perpetuating as land prices fall. The CCP authorities have thus far delayed this situation by encouraging SOEs to get more active in the property sector. By buying land, acquiring good assets from private developers, and carrying out mergers, the state-backed companies have helped to stabilize the Chinese economy. Such actions, however, are unsustainable in the long-run without sufficient consumer demand, Beijing’s “zero-COVID” policy still in place, and the central government struggling to get local governments to properly implement its economic rescue package.
2. The CCP’s effort to reverse economic deterioration by stimulating the property sector is being stymied by its other policies. For one, Xi Jinping’s “houses are for living, not speculation” policy has left many people skeptical about buying property as investment since the phenomenon of housing prices going up without falling no longer seems to hold. Then there is the “zero-COVID” policy, which has seriously impacted the economy and has led to wave after wave of layoffs (tech companies) and pay cuts (civil service). This in turn is dissuading those from higher income groups (tech workers, civil servants, etc.) from buying property.
Recently, Chinese netizens shared on social media comparisons of data from mainland company information provider Tianyancha showing that social security beneficiaries dropped significantly at Chinese tech companies and large private education and training companies between June 1, 2021 and June 1, 2022.
Tech firms (total 34,402 fewer beneficiaries)
- Tencent: 3,865 fewer beneficiaries
- Alibaba: 4,375 fewer beneficiaries
- Baidu: 3,952 fewer beneficiaries
- Didi: 5,237 fewer beneficiaries
- Meituan: 3,186 fewer beneficiaries
- Bytedance: 7,358 fewer beneficiaries
- Kuaishou: 3,586 fewer beneficiaries
- JD.com: 1,685 fewer beneficiaries
- Pinduoduo: 100 fewer beneficiaries
- NetEase: 1,058 fewer beneficiaries
Private education and training firms (total 117,431 fewer beneficiaries)
- New Oriental: 55,896 fewer beneficiaries
- Xueersi: 26,579 fewer beneficiaries
- Zuoyebang: 15,369 fewer beneficiaries
- Yuanfudao: 19,587 fewer beneficiaries
The number of social security beneficiaries at large companies has some relation to employment figures. Those companies also employ large numbers of contract workers or staff who are with third-party labor companies, and the companies are not required to make social security contributions for those employees. However, employees for whom large companies have to make social security contributions are regular, long-term workers who belong to higher income groups. The reduction in social security beneficiaries in large companies over a year indicates that unemployment numbers are up and the pool of people who are more likely to buy property is shrinking.
We previously noted reports and online complaints from civil servants about pay cuts in December 2021. In May, news of sharp pay cuts for civil servants in Shenzhen, one of the richest first-tier cities, began to surface again. According to mainland media reports, a Shenzhen civil servant wrote in a social media post that they had to take pay cuts of between 50,000 yuan to 80,000 yuan in 2021, or drops in annual salary from about 300,000 yuan to 250,000 yuan. “Now if [pay] drops below 160,000 yuan, that’s a bit overblown. Putting aside meals, we can’t pay the mortgage,” and many in Shenzhen will suddenly see many foreclosures, the civil servant wrote.
A middle school teacher in Shenzhen wrote on social media, “The company sent this form over this morning, which tells us to voluntarily take a pay cut in principle, and told us to fill it out. Those who don’t wish to voluntarily take a pay cut need to state their reasons.”
Some Chinese netizens also shared on social media that a recent central bank-led banking and financial sector risk control conference noted that there are nearly 40 million homes with mortgage issues in China and over 10 million foreclosed homes nationwide. The information, if accurate, offers a glimpse into the impact of layoffs and pay cuts on the housing market. More worryingly, the information hints at significant systemic financial risk; assuming that the average outstanding bank loan on each of the 50 million homes is 1 million yuan (a conservative estimate), then the banking industry could potentially be saddled with up to 5 trillion yuan in bad debts.
All in all, the CCP’s efforts to ease property sector restrictions to boost the economy face severe headwinds. Poor economic prospects (layoffs, pay cuts, etc.), the CCP’s deficient system (corrupt officials who “prefer left rather than right,” orders not leaving Zhongnanhai, etc.), and bad policies (“zero-COVID,” central government unwilling to hand over cash directly to residents to stimulate consumption, etc.) are combining to drive down the Chinese people’s ability to spend and make Beijing’s economic rescue measures work. On the current trajectory, China’s economic growth will slip out of the “reasonable range” as identified by Li Keqiang and enter into a recession this year.
