SinoInsight 1
Personnel appointment
July 29
The official WeChat account of the PRC Ministry of Industry and Information Technology (MIIT) announced that Jin Zhuanglong, executive deputy director of the Central Military-Civil Integration Office, has been appointed as secretary of the MIIT’s Party group. The news meant that Jin will likely eventually become minister of industry and information technology and replace his immediate predecessor Xiao Yaqing, who is under investigation.
Jin Zhuanglong (age 58), spent the bulk of his career in the aerospace system. He previously served in the Shanghai Aerospace Administration (June 1989 to Dec. 2001), eventually becoming its director (June 1999 to June 2004). Jin also held positions at the China Aerospace Science and Technology Corporation (June 1999 to June 2004), the Commission for Science, Technology and Industry for National Defense (June 2004 to March 2003), and the Commercial Aircraft Corporation of China (March 2008 to Sept. 2017). In June 2017, Jin was promoted to executive deputy director of the Central Military-Civil Integration Office and reached the ministerial-rank.
Personnel purges
Political and legal affairs apparatus
July 29
Liu Hongli (63, retired in June 2019), former Party group member and director of the Sichuan Provincial Procuratorate’s political department, was investigated.
Aug. 4
1. The Liaoning Provincial Commission for Discipline Inspection and Supervision announced the investigation of Liu Jiaduo (59), a Party Committee member and deputy director of the Liaoning Provincial Public Security Bureau (PSB).
Before being appointed to his current offices in August 2015, Liu had served as deputy Party secretary and deputy director of the Tieling Municipal PSB, chief of the Liaoning Provincial PSB’s economic investigation corps, and head of the Liaoning PSB’s criminal police corps.
2. Su Chi (65, retired in Dec. 2017), the former Party secretary and president of the Beijing Intellectual Property Court, was investigated.
Financial system
July 29
1. Xia Jun, Party secretary and director of the Kaifeng branch of the China Banking and Insurance Regulatory Commission (CBIRC) in Henan Province, was investigated.
2. Guo Qin (57, female), director of the second non-banking division of the Henan branch of the CBIRC, was investigated.
Guo spent her whole career in the Henan CBIRC. She formerly served as director of the second division supervising rural small and medium-sized financial institutions (Feb. 2015 to Oct. 2018); director of the division supervising new rural financial institutions and first-rank investigator of the Henan CBIRC’s second non-banking division (April 2019 to Oct. 2020); and director and first-rank investigator of the second non-banking division of the Henan CBIRC (Oct. 2020 to June 2022). In June 2022, Guo was no longer serving as director of the Henan CBIRC second non-banking division.
3. Zhao Dewang (57), director of the financial stability division of the Zhengzhou Central sub-branch of the People’s Bank of China in Henan Province, was investigated.
Aug. 1
Wang Hui (59, female), Party Committee member and vice president of the Inner Mongolia Autonomous Region Branch of the Export–Import Bank of China, was investigated.
Aug. 5
Guan Qifeng (63), former Party Committee member and deputy director of the Henan Rural Credit Union, was subjected to disciplinary review and supervisory investigation.
Guan spent the early part of his career as head of the information technology department of the Agricultural Bank of China (Nov. 1998 to June 2009). Later, Guan was appointed deputy director and Party Committee member of Henan Rural Credit Union, positions that he held for many years (June 2009 to June 2020). In June 2020, Guan was appointed counselor to the Henan provincial government, a “second-line” position.
State Council ministry
Aug. 5
Wang Bing, former deputy Party secretary and director of State-owned Assets Supervision and Administration Commission’s (SASAC) light industry organization service center, and Li Qin, former deputy secretary and director of the SASAC nonferrous metals service center, were investigated, according to the website of the Central Commission for Discipline Inspection and the National Supervisory Commission.
Central-owned enterprise
July 30
The Beijing Municipal Commission of Supervision announced that Ding Wenwu, general manager of the China Integrated Circuit Industry Investment Fund, was placed under investigation. The announcement confirmed earlier mainland media reports of the development.
OUR TAKE
The Xi leadership appears to be pressing ahead with its effort to “rectify” the various regime apparatuses and consolidate Xi Jinping’s control over them through the recent personnel purges and reshuffles.
Political and legal affairs
The investigation of retired officials Liu Hongli and Su Chi indicate that the “rectification” of the political and legal affairs apparatus is still underway despite the conclusion of the national “education and rectification” earlier this year. The two officials could have been purged after the authorities obtained evidence of their corruption during the national “education and rectification” campaign. They could have also met their downfall as younger officials search for “stepping stones” (i.e. retired officials with no power) to advance their careers under the Xi leadership’s brand of “political correctness,” as we earlier analyzed.
Meanwhile, the purge of Liaoning PSB deputy director Liu Jiaduo appears to affirm our previous analysis that the Xi leadership is appointing officials from outside the political and legal affairs apparatus to top domestic security positions in former Jiang faction strongholds to carry out “rectification” work. Notably, Liu was investigated a few short months into the tenure of Liaoning public security chief Zheng Yi, an official with no prior political and legal affairs work experience. On a related note, former Jiangsu Provincial Political and Legal Affairs Commission secretary and PSB director Wang Like served as deputy director of the Liaoning PSB before being transferred to Jiangsu.
Financial sector
The investigation of several financial officials in Henan follows the downfall of Henan CBIRC supervision bureau first-rank inspector Li Huanting and appears to be linked to the problem with small- and medium-sized banks in the province. In particular, Guo Qin from the Henan CBIRC was once Li’s subordinate; Guo no longer serving as director of the Henan CBIRC second non-banking division in June 2022 coincided with the blowing up of the Henan rural bank problems.
The seriousness of the small- and medium-sized bank problem in Henan, which we believe to be just the tip of the iceberg of financial risks in China, will likely lead to the purge of more local officials as Beijing looks to sacrifice scapegoats and cover up greater trouble with the banks. Mid-level cadres in the Henan financial and regulatory agencies are at risk of being investigated in the coming weeks.
Chip ‘great leap’ accountability
We noted in the July 28 newsletter that former minister of industry and information technology Xiao Yaqing and several other officials who were responsible for overseeing chip development were likely investigated over their failure to advance the Xi leadership’s semiconductor “great leap forward.” The recent purge of SASAC officials Wang Bing and Li Qin is likely due to their association with Xiao, whose time at the SASAC (2015 to 2019) largely overlapped with the investment period of China Integrated Circuit Industry Investment Fund’s 15-year plan to drive the PRC’s chip self-sufficiency. The Xi leadership will likely investigate other officials who were in charge of chip development as it seeks accountability for the semiconductor “great leap forward’s” inability to take off.
The appointment of Jin Zhuanglong to replace Xiao Yaqing suggests that the Xi leadership is looking to expand the MIIT’s role in the development of military-civilian integration projects. The Xi leadership would also feel more comfortable having a technocrat with no obvious factional leanings head the MIIT; Xiao formerly succeeded Jiang faction member Guo Shengkun at the Aluminum Corporation of China and once served under Jiang faction member Zhang Dejiang when the latter was vice premier.
SinoInsight 2
July 26
The Hubei Provincial Banking and Insurance Regulatory Bureau disclosed that the Wuhan branch of Shanghai Pudong Development Bank was fined 7.85 million yuan for 17 major violations of law and regulations. Three of the 17 violations involved the illegal flow of funds into the real estate sector.
According to incomplete statistics compiled by mainland media, Shanghai Pudong Development Bank had received 47 fines with 122 million yuan since 2021. Of the 122 million yuan, 10.4 million yuan was in connection with the real estate sector. Shanghai Pudong Development Bank’s 2021 financial report showed that its real estate loan balance for that year was 331.015 billion yuan, of which 9.103 billion yuan was non-performing loans (up 26.92 percent year-on-year). Shanghai Pudong Development Bank’s real estate non-performing loan ratio was 2.75 percent, up 0.68 percent from a year ago.
July 30
Mainland media reported a suspected “deposit insurance” fraud case involving 200 million yuan in Raoyang County in Hebei Province.
Villagers from dozens of villages had earlier put their life savings in the local insurance company People’s Health Insurance Co., Ltd. Hengshui Central Branch (中國人民健康保險股份有限公司衡水中心支公司) under the impression that they were handing their money over to the Raoyang Rural Credit Cooperative (饒陽農信社). They did so because some of the insurance salespersons of the former company used to work for the latter company, and the villagers trusted those salespersons.
In May 2022, villagers in Raoyang County discovered that they could not withdraw their deposits from the People’s Health Insurance Hengshui Central Branch. An investigation by mainland media reporters uncovered that those deposits had been transferred to the personal account of a “Ms. Fan” (範某霞), the person-in-charge of the dozens of insurance salespersons to whom the villagers had handed over their money, from 2017. “Ms. Fan” was also found to be affiliated with a number of other companies. A person familiar with the matter told mainland media that “a large portion of the money taken ‘Ms. Fan’ and others have been invested in other industries, mainly in real estate. Her capital chain would be overwhelmed to a degree given the bad real estate situation of the past two years.”
According to mainland media, the Hengshui People’s Health Insurance claimed that they had never issued the insurance product held by the Raoyang villagers and that villagers’ “insurance policy” documents had been stamped with a fake company seal. Hengshui People’s Health Insurance also said that “Ms. Fan” had left the company in June 2017. Meanwhile, the Wuqiang County People’s Court rejected a civil suit filed by a Raoyang villager against the People’s Health Insurance Hengshui Central Branch on June 6 this year, claiming that the villager’s “insurance policy” had been stamped with a fake seal. Mainland media reported that a lawyer who is following the matter and happens to be a representative of the People’s Congress in Hebei’s Xingtai County had questioned how the People’s Health Insurance Hengshui Central Branch was able to collect premiums for up to a decade using a fake seal.
Raoyang County villagers have since sought out the insurance salespersons who sold them the “product” to get their money back. Faced with this pressure, several of those salespersons attempted suicide, with one death. The deceased wrote in a suicide note, “How did the insurance product that we’ve been selling for a decade turn out to be a fake?” At one point, the villagers also tried to get their money back from Raoyang Rural Credit Cooperative, which denied affiliation with the People’s Health Insurance Hengshui Central Branch.
The Raoyang local authorities announced the arrest of at least 26 suspects, including “Ms. Fan” and some insurance salespersons under her, over the suspected insurance fraud case.
Aug. 5
1. The Henan Banking and Insurance Regulatory Commission and provincial financial supervision bureau announced that bank customers with deposits of between 150,000 yuan and 250,000 yuan in the four troubled Henan banks (Yuzhou Xinminsheng Village Bank, Shangcai Huimin Country Bank, Zhecheng Huanghuai Community Bank, Kaifeng New Oriental Rural Bank) will be repaid from Aug. 8, 2022.
2. China Chengxin Credit Rating Group disclosed that the Bank of Ningxia’s internet joint loans dropped by 44.74 percent to 6.177 billion yuan at the end of 2021 as compared to the start of the year due to regulatory requirements to reduce offsite joint loans, according to a report by mainland media 21st Century Business Herald. The Bank of Ningxia’s non-performing loan ratio at the end of 2021 increased 2.97 percent from the beginning of the year to 5.19 percent (321 million yuan).
21st Century Business Herald also noted that the Bank of Ningxia’s net operating revenue in 2021 increased 11.74 percent from a year ago to 3.377 billion yuan, and its net profit increased 4.19 percent to 664 million yuan.
Property sector problems
July 28
The Financial Times reported that the People’s Bank of China is planning an initial issue of 200 billion yuan of low-interest loans (1.75 percent per year) to state commercial banks to help them refinance stalled real estate projects. According to people familiar with the matter, the PRC government hopes that the banks will leverage this initial fund by up to five times to raise 1 trillion yuan and partially cover the funding gap to complete unfinished projects.
July 29
In an exchange filing, China Evergrande Group offered some “preliminary restructuring principles” for its offshore debt and added that it aims to announce “a specific offshore restructuring plan within 2022.”
Aug. 4
The number of unfinished projects whose buyers have suspended mortgage payments increased to 325 in 115 cities. The three cities with the most stalled projects are Zhengzhou (42), Wuhan (16), and Changsha (11).
Aug. 5
1. The Zhengzhou municipal government issued a plan to establish and operate a real estate relief fund (鄭州市房地產紓困基金設立運作方案). The special bailout fund has a tentative scale of 10 billion yuan and aims to “alleviate prominent social problems and possible systemic financial risks” caused by the recent wave of mortgage boycotts, according to mainland media.
The bailout fund will serve as a parent fund to sub-funds operated by state-owned enterprises and social capital. The bailout fund shall not make contributions of more than 30 percent per distressed project.
An investor from a leading real estate company in Zhengzhou told mainland media that projects with more assets than liabilities have already resolved their problems though the market and the local government does not need to step in. The investor added that the effectiveness of the bailout fund remains to be seen because the requirements for stalled projects to receive a bailout are too stringent.
2. Mainland real estate information provider CRIC noted that 13 cities—Beijing, Xi’an, Chengdu, Ningbo, Shaoxing, Sanya, Guangzhou, Dongguan, Jinhua, Wenzhou, Hefei, Quzhou, and Wuxi—have either canceled or optimized their second-hand housing reference price policy.
Local governments have taken to adjusting the reference price of second-hand housing to curb housing prices. For instance, Shenzhen took the lead in introducing a reference price release mechanism for second-hand housing transactions in February 2021. The reference price in Shenzhen was set at the equivalent of a 30 percent discount off the market price, and banks issued loans based on the reference price.
OUR TAKE
Financial risks associated with the real estate sector, as well as small- and medium-sized banks, continue to expand. Meanwhile, the CCP authorities do not appear to have effective measures to defuse those risks and resolve property sector woes.
1. The “deposit insurance” suspected fraud case in Raoyang County exposed serious corruption in the financial sector and gaping loopholes in government supervision over financial matters. Particularly egregious was how “Ms. Fan” and her associates were able to perpetuate the fraud scheme for nearly five years after she left the insurance company and while using a fake seal to stamp “insurance policies.”
The Raoyang case also appeared to be an instance of financial contagion from the real estate sector debt crisis bubbling to the surface. The fraud scheme of “Ms. Fan” and others was likely not exposed previously because they were still able to make payments to the Raoyang villagers using the profits generated from their investments (with the money they took from the villagers) in the property sector and other industries. With the real estate sector performing badly in the past two years, “Ms. Fan’s” funds would have dried up, and with that, the ability to sustain the scheme and continue defrauding the villagers.
The CCP authorities could see its credibility further undermined by the Raoyang suspected fraud case. The Chinese people have long equated the credibility of banks and other financial institutions in China with that of the PRC government. It does not help matters that People’s Health Insurance and the Raoyang Rural Credit Cooperative are both government-linked entities. Even if the case turns out to be the fault of a few bad apples, the Raoyang villagers will still hold the government responsible for losing their life savings and demand a degree of accountability. Failure on the part of the authorities to deliver a satisfactory resolution to the suspected fraud case will impact the political legitimacy of the CCP.
Meanwhile, the recent news about Shanghai Pudong Development Bank and the Bank of Ningxia underscores the problem of funds illegally flowing into the real estate sector, as well as the risky nature of interconnected loans issued by small and medium-sized banks. Chinese financial institutions will increasingly run into trouble as the real estate debt crisis worsens and more developers default on their loans.
2. The CCP’s efforts to rescue the real estate sector are unlikely to be effective given the seriousness and interconnected nature of the crisis, as well as the inherent deficiencies of the authoritarian Party system.
Unfinished projects are a longstanding problem in China, and the risks are usually borne by the buyers. The CCP authorities were also previously able to use “stability maintenance” measures to suppress protests over stalled projects and keep the situation in check. The current wave of mortgage boycotts and the ongoing property sector debt crisis, however, are forcing the CCP government to find solutions for the problem of unfinished projects lest regime security is endangered.
The situation is as follows. Stalled projects are on the rise because distressed developers are running out of liquidity to complete them and purchase land for new developments. Falling land prices and the growing number of unfinished projects will in turn depress house prices and affect new home sales. Real estate sales are further impacted by rising unemployment (tech sector layoffs, etc.) and salary cuts (civil servants, etc.). Property sector trouble also leaves banks with increased non-performing loans and other problems. The resultant vicious cycle will heap on the hardships of most Chinese people, and will in time sharply erode government credibility and the political legitimacy of the CCP.
The CCP authorities’ current measures, however, do not appear to adequately resolve the problem or tackle its scale. The 1 trillion yuan in funds that the government is looking to make available through commercial banks to help finish projects is short of the 2.4 trillion yuan (or 6.4 percent) of mortgages that are at risk in S&P Global Ratings’ estimated worst-case scenario. Meanwhile, the Zhengzhou government’s bailout fund will hardly help distressed developers who are in need of them given the strict requirements for receiving them. For instance, developers need to demonstrate that their unfinished projects have “sufficient remaining inventory value,” have more assets than liabilities, and have “remaining saleable inventory value sufficient to cover liabilities, principal, and interest of invested capital” to get a bailout. However, developers who have more assets than liabilities do not need a bailout in the first place, while those who are in need of a bailout may not qualify for one because they have very likely sold most of the inventory in their unfinished projects but misappropriated the escrow funds for other projects.
Local governments likely also lack funds this year to help distressed developers. Nomura analysts previously estimated that the PRC government has a revenue gap of about 6 trillion yuan, or 2.5 trillion yuan in reduced revenue due to tax refunds and weaker economic production, and an additional 3.5 trillion yuan of lost land sales revenue.
Corruption is another problem that the CCP authorities have to overcome. Corrupt officials will inevitably find ways to siphon funds meant for troubled developers into their pockets or those of their associates. This will undermine the government bailout program and cut into the effectiveness of Beijing’s effort to resolve the property sector crisis.
