SinoInsight 1
Personnel reshuffles
July 5
Zhao Chongjiu, vice minister of transport, visited Qinhuangdao City in Hebei Province to supervise and inspect transportation security work, according to mainland media reports. Zhao “held talks and exchanged opinions” with Hu Qisheng, the vice governor of Hebei, and Dong Xiaoyu, a Standing Committee member of the Hebei provincial Party Committee and secretary of the Hebei provincial Political and Legal Affairs Commission (PLAC).
Analysis: Mainland media’s introduction of Dong Xiaoyu (age 53) as Hebei PLAC secretary indicates that he has replaced Zhao Ge (52) in the position. We noted in the July 7 edition of this newsletter that Hong Kong media had reported that Zhao died of illness in May, but the news was not covered by mainland media.
Dong is a native of Hebei. He has no prior experience in the political and legal affairs apparatus, and previously served as mayor and Party secretary of several prefecture-level cities in Hebei. Dong was promoted to Standing Committee of the Hebei Party Committee at the end of 2021 and was appointed Party Committee secretary-general this January.
Purges
July 5
Xiao Peng (63, retired in March 2019), former deputy secretary of the Dalian People’s Procuratorate Party group and deputy chief prosecutor, was investigated.
July 6
Zhang Ming (61, retired in Dec. 2021), former second-rank inspector of the Shaanxi Provincial Public Security Bureau, was investigated.
Indictments
July 8
Sun Lijun, the former public security vice minister, pleaded guilty to accepting bribes, manipulating the securities market, and illegally possessing firearms at the Changchun Intermediate People’s Court in Jilin Province, according to state media reports.
The Changchun People’s Procuratorate accused Sun of taking more than 646 million yuan in bribes. Sun also allegedly gave orders in 2018, at the request of others, to carry out continuous trading and secure “concentrated capital advantages.” Those actions influenced stock trading prices and volumes and the “circumstances of the crime were particularly serious.”
Analysis: The Central Commission for Discipline Inspection’s political charges against Sun Lijun when announcing his expulsion from the Party and office (雙開, or “shuangkai”) in Sept. 2021 were omitted in his criminal trial at the Changchun Intermediate People’s Court.
Previously, the anti-corruption authorities had accused Sun of having “engaged with cliques and factions in the Party, formed gangs and factions, cultivated personal followers, formed interest groups, controlled vital departments with gangs, seriously undermined Party unity, and endangered political security.” Sun was also accused of having “deserted his post on the frontline of fighting the COVID-19 epidemic” and “privately possessed confidential materials without authorization.”
July 11
Changchun prosecutors announced that former PRC justice minister and public security vice minister Fu Zhenghua will be prosecuted for taking bribes and aiding criminals, according to state media. Prosecutors accused Fu of having “deliberately sheltered criminal suspects from prosecution and committed major crimes.”
Analysis: As with the Sun Lijun case, Fu Zhenghua is not being put on trial for the political charges leveled against him. When the CCDI announced Fu’s expulsion from the Party and office, he was accused of having “participated in Sun Lijun’s political gang, formed gangs and factions, and formed interest groups,” “defrauded and deceived Party Central on major issues, endangering the centralization and unity of the Party,” and “long-term friendships with many ‘political liars.’”
OUR TAKE
1. The recent purges and trials of officials in the political and legal affairs apparatus are in line with Xi Jinping’s ongoing efforts to “rectify” the apparatus and broader “self-revolution” campaign for the Party.
The purges and trials also appear to be aimed at rooting out Xi’s factional rivals and their remaining supporters in the regime. We previously noted that Sun Lijun and Fu Zhenghua rose to senior positions in the political and legal affairs apparatus during the Jiang faction’s era of dominance and were trusted enough to be appointed to key leadership positions in the now-defunct “610 Office,” which oversaw Jiang Zemin’s persecution of Falun Gong. If Xi intends to make an example of Sun and Fu to “kill the chickens to scare the monkeys” (殺鷄儆猴) in the political and legal affairs apparatus and underscore his determination to “turn the knife inward” in carrying out “self-revolution,” then it cannot be ruled out that both men could be sentenced to death (though likely commuted to life imprisonment).
Xiao Peng (former Dalian deputy chief prosecutor) and Zhang Ming (former second-rank inspector in Shaanxi), were also both career political and legal affairs officials and won promotion when the Jiang faction was dominant. Both men were investigated after they were retired and the timing of the probe into them coincides with the political and legal affairs “education and rectification” campaign that was launched last year. As we previously analyzed, retired officials and their cronies are at risk of being investigated and punished as younger officials who owe their career progression to Xi look to secure political capital and better career prospects.
2. The indictment of Sun Lijun and Fu Zhenghua, like the recent trial of Xiao Jianhua and Alvin Chau, happened to come just before the annual Beidaihe meeting held for several weeks from July to August. The Xi leadership likely arranged for the trials and indictment of the noted Jiang faction loyalists and “white gloves” (bagmen) to take place before Beidaihe to put his political opponents on notice and dissuade them from challenging Xi Jinping’s 20th Party Congress political agenda (third term and key personnel appointments) during informal meetings and discussions.
The Jiang faction has the most reason for concern among Xi’s political enemies in the Party elite. The Xi leadership’s investigation of Xiao Jianhua and Alvin Chau should have yielded information about the financial dealings (money laundering, illicit cross-border transactions, other illegal activities, etc.) of the Jiang clan, the Zeng clan, and other Party elite interest groups who may be thinking about undermining Xi. Xi could look to turn this information into political leverage and dissuade factional rivals from moving against him. Meanwhile, the purge of Sun Lijun and Fu Zhenghua potentially implicates their superiors and political patrons like Guo Shengkun, Meng Jianzhu, and Zeng Qinghong. Yet the “you die, I live” nature of CCP factional struggle dictates that the Jiang faction is not likely to be cowed into inaction by Xi’s political leverage, and could instead double down on schemes to undermine the Xi leadership before the 20th Party Congress.
The COVID-19 pandemic gives Xi Jinping another card to play against fractious Party elites. To limit “improper discussions of Party Central” and efforts at political mobilization against Xi at Beidaihe and in other settings, the Xi leadership could attempt to limit interactions among senior CCP cadres under the pretext of implementing “epidemic prevention and control.”
SinoInsight 2
Housing policy
July 6
The Shenzhen municipal Housing and Construction Bureau solicited public views on revising the city’s housing provident fund loan management regulations. Items up for revision include streamlining the definition of provident fund loans and adjusting the scope of provident fund co-applicants to include the applicant’s spouse, parents, and children regardless of whether they have made housing provident fund contributions. Mainland media reported that if the co-applicant regulation revision goes through, the phenomenon of “one person buying a house with the whole family’s help” (一人購房全家幫) will become a reality in Shenzhen.
Several local governments have already adjusted their housing provident fund policy to enable “one person to buy a house with the whole family’s help” since the start of the year. According to incomplete data compiled by mainland media, the policy is being implemented in the cities of Xianning, Chizhou, Quanzhou, Zhuhai, Tianjin, Ganzhou, Cangzhou, Qinhuangdao, and Tangshan.
July 8
Mainland media reported that a real estate project in Guangzhou City’s Zengcheng District is offering a “swap lychee for house” deal where buyers can make up to 50,000 yuan worth of lychee in down payments. The “swap lychee for house” deal follows other “crop for house” deals that property developers have been offering recently, including “wheat for house,” “garlic for house,” and “watermelon for house.”
July 11
The local government of Sanmenxia City in Henan Province introduced 17 new policies to stabilize the local property market, including offering first-time home buyers up to 30,000 yuan in subsidies and tax benefits to second-hand home sellers.
July 12
The National Development and Reform Commission issued the “14th Five-Year-Plan New Urbanization Implementation Plan” (“十四五”新型城鎮化實施方案). The plan proposed completely lifting household registration (hukou) settlement restrictions on cities with a permanent population of less than 3 million people, and fully relaxing settlement restrictions for I-type cities with a permanent population of between 3 million to 5 million people.
July 13
Many local governments have issued policies to support and encourage group buying (團購) of commercial housing, according to semi-official mainland media The Paper.
Citing incomplete statistics, The Paper noted that the municipal governments of Taiyuan, Zhongshan, Shenyang, Tonglu, Tongling, Puer, Bazhong, Huanggang, Changchun, and other places have released documents or made measures to facilitate the “house group buying” (購房團購) since June 2022. Several cities are offering various group buying discounts; Bazhong City does not record the discounted group buying price as the official sale price, a measure that allows the city to circumvent its own restrictions limiting property price drops.
The Paper also reported that some cities have gone in the opposite direction to prohibit group buying of property to stabilize local property prices. For instance, Sanmenxia City in Henan Province issued a notice on July 11 requiring property developers to strictly implement the pre-sale price filing system for new commercial housing and keep prices stable. Further, government organs, public institutions, and state-owned enterprises are forbidden from organizing new group buying efforts and “directing property developing behavior.” Zhengzhou City in Henan issued a similar notice in March.
Developer debt issues and financial contagion
July 3
Chinese property developer Shimao Group missed the interest and principal payment of a $1 billion offshore bond. The company claimed “market uncertainties over debt refinancing” and “challenging operating and funding conditions.”
Moody’s earlier estimated that Shimao has a large amount of debt maturing in 2022, including $1.7 billion in offshore bonds, 8.9 billion yuan in onshore bonds, and “sizable” offshore bank loans.
July 8
Shenzhen-based property developer Grandland Group announced that it was suspending the trading of its shares for a day on July 11, 2022. Grandland shares will resume trading on July 12 under the ticker symbol “ST Grandland” (ST廣田) and be subjected to other risk warnings.
According to mainland media reports, Grandland and its subsidiaries had accumulated 2.661 billion yuan in overdue principal repayments to banks and other financial institutions as of July 8. Grandland’s total liabilities reached 15.114 billion yuan by the first quarter of 2022, with an asset-to-liability ratio of 97 percent.
Grandland noted in its 2021 performance forecast that it had been affected by the debt default of its “top customer” (China Evergrande) since mid-2021. Grandland added that its “top customer” and its subsidiaries were overdue 3.247 billion yuan in commercial papers as of Dec. 31, 2021.
Grandland was a leading architectural decoration design and construction company in China (ranked second in the list of top 100 companies in its industry for five consecutive years) with annual revenue of over 10 billion yuan. The company, however, relies heavily on Evergrande for its operating revenue. From 2019 to 2021, Grandland’s revenue from doing business with Evergrande accounted for 46.54 percent, 44.92 percent, and 37.99 percent of its total revenue. In comparison, Grandland’s second-largest to fifth-largest customers accounted for around 8 percent of its revenue in 2020, or less than a fifth of its revenue from Evergrande.
July 10
Ronshine China, a Chinese property developer with sales in the 100 billion yuan range, announced that it had not made interest payments of about $27.9 million on its June 2023 and December 2023 U.S. dollar notes. The company currently has six dollar bonds worth $2.245 billion, and is due to make a payment on the principal of $688 million in three months time.
The next day, Moody’s downgraded Ronshine to Ca from Caa1, citing the company’s “weak liquidity and limited financial flexibility,” as well as “weak recovery prospects for its creditors.”
Ronshine earlier announced on July 4 that it was extending payment on two onshore bonds (“19 Ronshine 01” with a 1 billion yuan principal; “19 Ronshine 02” with 1.15 billion yuan in remaining principal). According to mainland media China Fund News, the company has extended 10 onshore bonds, including the two recently extended notes, with a total principal amount of 10.8 billion yuan. Ronshine also has four onshore bonds worth about 5.5 billion yuan that will mature or can be sold back within half a year, and eight bonds worth about 8.7 billion yuan that will mature within the year.
Ronshine also has a number of overdue commercial papers. As of June 30, 2022, five of Ronshine’s commercial papers with amounts ranging from hundreds of thousands of yuan to nearly 10 million yuan have appeared on the Shanghai Commercial Paper Exchange Corporation’s “continuously overdue” list.
Ronshine’s sales improved slightly in June, but still declined by 38.7 percent from a year ago to 9.102 billion yuan. In the first half of 2022, the company’s total contracted sales decreased 53.3 percent year-on-year to 38.737 billion yuan.
Unfinished project mortgage boycotts
July 12 and July 13
Mainland media reported the growing phenomenon of home buyers halting mortgage payments on unfinished projects.
According to statistics circulating on the internet, buyers of at least 100 unfinished projects in 18 provinces have suspended mortgage payments between June 13 to July 13. Henan has the most unfinished projects (32), followed by Hubei (15); Hunan (14); Jiangxi (5); Hebei and Jiangsu (4 each); Guangdong, Guangxi, Chongqing, Shandong, Liaoning, and Shaanxi (3 each); Shanxi and Yunnan (2 each); and Jilin, Sichuan, Anhui, and Fujian (1 each).
The 100 unfinished projects are located in some attractive areas like provincial capital cities and mostly in less attractive places like third- and fourth-tier cities. Developers of those unfinished projects include China Evergrande (35 projects), China Aoyuan Group, Xinli Holdings, Languang Development, Tahoe Group, Shimao Group, Xinyuan Group, and Seedland Group. Analysts expect the number of unfinished projects facing mortgage boycotts to rise sharply.
The buyers of unfinished projects noted in the notices of mortgage suspension that their banks issued loans with varying degrees of irregularities and did not fulfill their fund supervision obligations. For example, an unnamed bank allegedly issued illegal mortgage loans for a property before its main structure was completed and transferred mortgage loan funds to unsupervised accounts.
Wang Yuchen, a lawyer at Beijing Jinsu Law Firm, told mainland reporters that banks are to blame for issuing illegal loans on many unfinished projects. “The delays or incompletion of many projects is directly related to developers misappropriating pre-sale funds. Also somewhat related are banks making illegal loans while local relevant departments [i.e. local authorities] do not take action or fail to carry out adequate supervision,” Wang said.
Zhang Dawei, chief analyst at Centaline Property Agency, told mainland media that current market disruptions in China’s real estate development are the result of “various deliberate loopholes in the actual operation of banks.” Most critically, banks are not doing their job in supervising pre-sale funds and are issuing illegal loans for substandard projects, Zhang added.
In 2010, the PRC Ministry of Housing and Urban‑Rural Development issued regulations (關於加強房地產市場監管完善商品房預售管理工作的通知) on property market supervision and established a system to oversee commercial housing pre-sale funds. Central and local governments further strengthened the supervision of pre-sale funds in the second half of 2021 to stop developers from excessively issuing “advance receipts” to pay off debt and ramp up their turnover rate in the face of liquidity pressure. Previously, developers followed the model of “high turnover is king” (高周轉才是王道) and found all sorts of way to empty supervised accounts to invest in new projects.
July 13
State media Securities Times published a commentary titled, “Beware the Spreading Risk of Unfinished Projects Supply Suspension” (謹防爛尾樓盤停供風險擴散). The commentary noted that the wave of unfinished projects may negatively impact the real estate market and property sales, which in turn is not conducive to the stability of the financial system.
The commentary urged local governments to study ways to “revitalize” stalled projects and prioritize their delivery to buyers.
2. Home buyers of 35 projects across 22 cities have stopped paying mortgages as of July 12 due to project delays and dropping real estate prices, according to a Citigroup research report. The report added that now is a “critical time for social stability” and the “forgoing of down payments may bring social instability.”
The report noted that financial contagion is spreading to banks, with non-performing loans triggered by the wave of mortgage payment halts estimated to reach 561 billion yuan, or about 1.4 percent of the outstanding mortgage balance. Also, state lenders like the China Construction Bank, Postal Savings Bank of China, and Industrial & Commercial Bank of China may have more exposure to mortgages and could see setbacks as investor sentiment dampens, according to the report.
July 14
Bloomberg News reported that the Ministry of Housing and Urban-Rural Development met with financial regulators and major Chinese banks to discuss the mortgage boycotts of unfinished projects, citing people familiar with the matter.
The people said that “there was no immediate solution” to the problem, and regulators asked local watchdogs and banks to report the impact of the phenomenon. Some banks also plan to tighten their mortgage lending requirements in high-risk cities.
OUR TAKE
1. The CCP has recently been releasing economic data and relying on propaganda to push the narrative of China’s economic recovery. Efforts by the central government and local governments to relax property restrictions and even stimulate sales in some areas, as well as “creative” sales tactics (accepting crops as partial down payment, etc.) by property developers, have also helped improve real estate sales in China in June. However, several indicators suggest that the aforementioned measures to rescue the property sector are akin to a band-aid on a gunshot wound.
Perhaps most telling are the remarks made by former PRC finance minister Lou Jiwei at the Caixin Summer Summit in Beijing on July 9. Lou noted in the summit’s opening address that while some local governments recently introduced policies to encourage residents to buy property, the effect of the stimulus policies is “not obvious.” He then suggested that people are not buying houses because their future income and employment expectations have become weaker, they are increasing their “precautionary savings,” or they simply do not have enough money to purchase property.
Developers also appear to not be making enough sales to pay off their debts. Recent offshore bond defaults by leading developers like Shimao and Ronshine bode ill for the rest of the industry. Shimao ranked 14th in the top 200 developers by sales in 2021 with total sales of 216.07 billion yuan, according to a list compiled by CRIC. Meanwhile, Ronshine came in 25th with total sales of 125.44 billion.
Country Garden, which topped the sales list for 2021 (720.86 billion yuan), may find it hard to avoid a debt crisis this year. In June, Moody’s downgraded Country Garden to junk status (Ba1 from Baa3) and changed its rating outlook to negative. Kaven Tsang, a senior vice president at Moody’s, said that Country Garden’s downgrade reflects its “declining property sales and deteriorating financial metrics amidst the challenging operating conditions of the China property sector, as well as its weakened access to long-term funding.” Tsang added that while Moody’s expects Country Garden to “maintain a strong market position and good liquidity,” the negative outlook reflects the developer’s “reducing liquidity buffer and financial flexibility, driven by falling property sales and continued weak market sentiment in the next 6 -12 months.” According to publicly available information, Country Garden’s total debt hit 1.65 trillion yuan at the end of 2021, second only to Evergrande (1.95 trillion yuan).
Per data previously released by China Index Academy, Chinese real estate companies are due to pay debts totaling 121.48 billion yuan and 101.17 billion yuan in July and August respectively. Markedly improved housing sales (still significantly worse compared year-on-year) in June as compared to April and May could help ease the property sector debt situation somewhat, but increasing defaults could see some developers become the next Evergrande. Meanwhile, Grandland Group’s debt troubles and those of companies who relied heavily on Evergrande will likely worsen further as the latter continues to struggle with its debt crisis.
2. The phenomenon of buyers suspending mortgage payments on unfinished projects and developers being unable to complete projects due to a lack of funds will worsen the property sector debt crisis, further the spread of financial contagion, and trigger systemic financial risks.
China Evergrande’s letter to the Guangdong government in September 2020 seeking help with its debt crisis offers a glimpse of how critical the unfinished project situation is for the CCP regime. Evergrande claimed that it had 792 projects in 229 cities as of June 30, 2020, and had hired 140,000 employees and created 3.17 million jobs as a result of those projects. The developer added it had sold 617,000 commercial property units to 2.04 million buyers, but had yet to deliver those projects; Evergrande warned that it faced the risk of being unable to finish projects, a scenario that will “seriously affect social stability.” Evergrande also noted that it was working with 8,441 upstream and downstream enterprises, and its liquidity problems would threaten 3.31 million jobs. Recent reports of unfinished Evergrande projects and mortgage payment halts could be merely scratching the surface of a deeper malaise.
According to data previously released by CRIC, the construction area and transaction units of unfinished or delayed projects in 24 cities in 2021 accounted for 10 percent and 9 percent respectively of the total construction area and total transaction units. And of the 24 cities, Zhengzhou had the most unfinished or delayed projects, accounting for 29 percent (2.71 million square meters) and 28 percent (25,249 units) of Zhengzhou’s total construction area and total transaction units respectively. With real estate sales in the first five months of 2022 almost halving from a year ago and the property sector debt crisis worsening, the proportion of unfinished or delayed projects could conservatively be 10 percent or higher this year.
Given the growing phenomenon of mortgage boycotts over unfinished projects, having just 10 percent of projects unfinished or delayed would spell trouble for banks in China. According to data from the National Bureau of Statistics, total sales of residential commercial housing in 2021 and from January to May 2022 were 16.2730 trillion yuan and 4.2317 trillion yuan respectively, or about 20.5 trillion yuan across 17 months. Assuming that 10 percent of the property sold turn out to be unfinished projects and buyers took out mortgages to pay 70 percent of the property cost, then banks would find themselves saddled with 1.4 trillion yuan worth of non-performing loans. We believe our estimate to be on the conservative side; Chinese capital market services company GF Securities estimated that 2 trillion yuan in mortgage loans could be impacted by the wave of mortgage suspensions over unfinished projects, according to mainland media reports.
The mortgage boycott wave will further erode buyer confidence and worsen the property sector debt crisis. Buyers will be wary of developers who appear on the unfinished projects list, and this would affect the sales of prominent and smaller developers alike. Developers are already struggling to attract funds from a shrinking pool of potential home buyers. In 2019, the Beijing Normal University’s China Income Distribution Research Institute estimated that there are 964 million people with a monthly income of less than 2,000 yuan a month, 63.28 million people in the 5,000 yuan to 10,000 yuan bracket, and 8.54 million people earning more than 10,000 yuan. The 71.82 million people in the latter two income brackets, who are better positioned to buy houses, would have dwindled after 2020 due to the pandemic, rapidly deteriorating economic conditions in China (which leads to people preferring to hold “precautionary savings” instead of buying property), and Beijing’s various policies (“zero-COVID,” tech sector and online tuition crackdown, etc.) triggering civil servant wage cuts and layoffs at Chinese tech firms.
The CCP authorities do not have a good way to resolve the mortgage boycott problem. Cash-strapped local governments are unlikely to have the financial means to support debt-ridden real estate companies in completing their unfinished projects. Getting banks to tighten mortgage lending will turn away potential home buyers and counteract the authorities’ policies to stimulate property sales. Not doing anything about the mortgage boycotts is out of the question because the problem will fester and destroy buyer confidence in the real estate sector.
Communist Party culture will also inhibit the effort by the central and local governments to rescue the real estate sector. The CCP’s authoritarian proclivities and officials’ “prefer left rather than right” mentality, as well as the need to ensure social stability before the 20th Party Congress, mean that local governments will inevitably resort to heavy-handed measures to deal with home buyers who have stopped mortgage payments and curb the boycott wave. Doing so will seriously erode the Party’s political legitimacy and escalate the PRC’s political risks; even those who are defenders of the regime will be alienated by the CCP’s callous disregard of their interests and mistreatment of its loyalists.
Worse for Xi and the CCP, financial contagion from the property sector debt crisis and unfinished project mortgage boycotts could soon more thoroughly expose and trigger systemic financial risks in the PRC’s banking system. We previously looked at the ties between the Bank of Nanjing and Evergrande; the problems of crisis-hit small- and medium-sized banks will exacerbate going forward, and will eventually impact the larger banks. According to Jefferies, four major state banks—Bank of China, Agricultural Bank of China, China Construction Bank, and Industrial and Commercial Bank of China—have the biggest mortgage exposure. Global economic recession and inflation will increase pressure on the Chinese economy, banks, and the property sector, creating a vicious cycle that the CCP regime will find difficult to escape from.
Xi Jinping’s grip on power may seem unshakable at the moment. But he will be sorely tested politically when economic and social trouble spirals out of control. Should crises continue on the current trajectory or worsen, political Black Swans could emerge in China before the 20th Party Congress.
