Zhengzhou housing project bailout funds go to office building project; purges rack up as Xi seeks accountability over various regime problems

     SinoInsight  1     

Real estate sector report

Aug. 5
Beike Research Institute published a survey report on housing vacancy rates in 28 of China’s major cities in 2022 (2022年中國主要城市住房空置率調查報告).

The report stated that the average housing vacancy rate in 28 medium- and large-sized cities in China is 12 percent, a relatively high figure. Of the 28 cities, the average housing vacancy rate in first-tier, second-tier, and third-tier cities is 7 percent, 12 percent, and 16 percent respectively. Just nine of the 28 cities have a housing vacancy rate between 5 percent to 10 percent (“reasonable” range), with the bulk of the cities in the 10 percent to 15 percent range (high range) and six cities with a vacancy rate of over 15 percent (very high range). The three cities with the highest housing vacancy rate are Nanchang (20 percent) in Jiangxi Province, Langfang (19 percent) in Hebei Province, and Foshan (15 percent) in Guangdong Province.

Beike Research Institute said that the report is based on data from its Beike housing transaction platform, the survey results from 50,000 brokers, a horizontal comparison of the current housing vacancy situation in various cities, an analysis of micro and macro influencing factors, and an analysis of the “real situation” of housing markets in which the 28 cities are situated.

Beike’s report elicited a strong response and heated discussion from the public. On Aug. 11, Beike Research Institute deleted its housing vacancy rate report and issued an apology. Beike also cited a list of “problems” with its report, including insufficiently standardized survey samples and procedures, deviations in survey responses, coverage that was “not comprehensive enough,” and some incorrectly collected data.

Unfinished projects

Aug. 9
A video circulating on Chinese social media showed about 100 buyers of units from the “Luoyang Sunrise Times Skyline” (洛陽旭輝時代天際) project in Henan Province protesting the stalling of the project for eight months in font of the Luoyang City Housing Security and Real Estate Service Center. The buyers were heard yelling, “return my house to me” and “we need to check the supervision [of the escrow account] period.”

The buyers demanded that the authorities step in and force the developer to resume construction work. Some of the buyers even went on their knees to make a show of begging the developer to complete the project. At the time of writing, “Luoyang Sunrise Times Skyline” is not listed on the crowdsourced list of unfinished projects on Github.

Aug. 10
The Github list of unfinished projects logged 327 stalled properties in 115 cities. Henan Province still tops the list with 66 incomplete projects.

Aug. 11
1. A video circulating on Chinese social media showed hundreds of home buyers of a stalled project protesting in front of a China Minsheng Bank branch in Shenzhen’s Futian District. The buyers were heard yelling, “Minsheng Bank, return our money!” Subsequently, riot police arrived on scene to suppress the protest.

According to information circulating on social media, the unfinished project in question is Kaisa Group’s Yuebanshan in Shenzhen. Buyers of units in the project claim that the local Minsheng Bank branch had allowed Kaisa to illegally withdraw 3 billion yuan from the project’s escrow account, resulting in the developer having insufficient funds to complete the project.

Buyers had earlier issued a notice declaring their suspension of mortgage payments on Kaisa Yuebanshan on July 12. Their notice said that the project was launched on Aug. 30, 2020 and 1,452 units had been sold. In November 2021, construction on the project was completely halted after funds in the escrow account were misappropriated. The notice added that the project currently has a funding gap of 250 million yuan.

Mainland media previously reported that Minsheng Bank has done a lot of business with about 20 troubled Chinese developers, including China Evergrande and Tahoe Group, and has up to 100 billion yuan of exposure to those developers. Citigroup analysts estimated in a September 2021 research report that Minsheng has about 130 billion yuan of exposure to high-risk developers, which amounts to 27 percent of its so-called tier-1 capital, the most among big Chinese banks.

Aug. 12
Seventeen property developers in Anhui’s Hefei City submitted a joint letter (關於請求維護營商環境, 增強房企投資信心的紓困解難報告) to the local government urging a crackdown on “malicious protests” by home buyers, according to mainland media reports. Dated Aug. 2, the letter was later widely circulated online and roundly condemned by the public.

The developers claimed in the letter that home buyers were making “unreasonable complaints and protests,” including refusing to accept renovations over defects, refusing to pay service fees during the maintenance period, and asking for huge compensation over minor issues with home quality.

The developers then demanded that the local government “resolutely curb” so-called “professional protests,” including “interviewing,” warning, and going after individuals and organizations who engage in “illegal crimes.” They also sought the government’s help in banning “false reports” in the media and punishing those who spread them. The developers also requested that the local government block “sensitive keywords” on the internet and prevent “unreasonable remarks” from spreading on the internet.

Real estate debt

Aug. 7
Chinese listed real estate company Logan Group announced that it would suspend interest payments on five offshore bonds worth nearly $1.7 billion and due from 2023 to 2028.

Logan Group ranked 20th (158.82 billion yuan in sales) among the top 100 real estate companies in China by sales in 2021.

Aug. 11
1. Fujian-based property developer Rongqiao Group announced that 65 percent (about 130 million yuan) of the equity that it holds in subsidiary Wuhan Rongqiao Real Estate (henceforth referred to as Wuhan Rongqiao) would be frozen from July 5, 2022 to July 4, 2025.

Mainland media reported that Rongqiao Group’s equity was frozen because it was Wuhan Rongqiao’s guarantor, and the latter had failed to make loan principal and interest repayments due May 18, 2022 on a trust plan set up by Ping An Trust (“Ping An Trust Anyuan No. 9 Collective Fund Trust Plan”). Separately, Rongqiao Group had 5 percent (about 47.23 million yuan) of the equity it held in Fujian Jiangyin International Container Terminal frozen (from July 8, 2022 to July 6, 2025) around the same time that its Wuhan Rongqiao stake was frozen.

Rongqiao Group ranks 9th in the list of top 100 enterprises in Fujian Province in 2021, with operating revenue of 20.6 billion yuan and total assets of 91.971 billion yuan.

2. Chinese developer Redsun Properties announced that it expects to suffer a net loss of between 350 million yuan to 450 million yuan in the first half of 2022. Additionally, the company has not made interest payments due on its most recent tranche of 2025 U.S. dollar-denominated notes, and is not expected to make payments on or before the end of the grace period on Aug. 12, 2022.

Redsun Group ranked 69th (38.21 billion yuan in sales) in the list of the top 100 real estate companies in China by sales in 2021.

Property sector rescue

Aug. 9
The Zhengzhou municipal government’s real estate relief fund, in conjunction with Zhengzhou Real Estate Group, reached a cooperation agreement with Central China Real Estate on the latter’s Beilonghu Financial Island (北龍湖金融島) office building project.

Central China Real Estate’s 2021 annual report noted that the Beilonghu Financial Island project is a commercial property with an area of 838,900 square meters under construction.

Analysis: The Zhengzhou government’s issuing of real estate relief funds to a commercial office building project instead of unfinished residential projects that home buyers are concerned about affirms the observations we made in the Aug. 8 newsletter. We noted that the bailout fund “will hardly help distressed developers who are in need of them given the strict requirements for receiving them” and how official corruption could lead to the misuse of funds.

Aug. 10
Chinese property developer Zhongnan Construction announced that its controlling shareholder, Zhongnan Holdings Group, had signed a cooperation framework agreement with Jiangsu Asset Management. Jiangsu Asset Management (90 percent stake) and Zhongnan Holdings (10 percent stake) plan to establish a three-year fund worth 2 billion yuan to jointly invest in projects by Zhongnan Holdings and its related parties. The projects include but are not limited to restructuring existing debt and the construction of existing property projects.

Zhongnan Construction had earlier announced on May 8 that Zhongnan Holdings had signed a strategic cooperation agreement with the Jiangsu branch of state bad-debt manager Huarong Asset Management and three other Jiangsu state-owned enterprises to support Zhongnan Holding’s transformation and development. The agreement allows Zhongnan Holdings to access investment funds of no more than 5 billion yuan.

Zhongnan Construction appears to be the private developer that has received the most support from state-owned enterprises at the time of writing. The company ranked 173rd in the 2022 Fortune China 500 list in July.

OUR TAKE
The various developments above show that efforts by the central government and local governments to save the real estate sector, a key pillar of China’s economic growth and source of fiscal revenue, are having a limited effect. Meanwhile, problems such as the debt crisis of developers, the wave of mortgage boycotts over unfinished projects, and financial contagion stemming from the real estate sector are becoming more serious.

1. Beike Research Institute likely retracted its housing vacancy rate survey report not because it contained errors or was poorly done, but because the CCP authorities needed to cover up information that hints at the true extent of the property sector crisis in mainland China and maintain buyer confidence.

In the report, Beike Research Institute found that China’s average housing vacancy rate may be lower than Japan’s (13.6 percent, but is higher than that of the United States (11.1 percent), Australia (9.8 percent), Canada (8.7 percent), France (7.8 percent), and the United Kingdom (0.9 percent). Beike’s research points to an oversupply of housing in China.

The Beike report also noted a significant correlation between the age structure of China’s population and housing demand, where the older the city, the higher the vacancy rate. This phenomenon seems likely to worsen in the coming years as Chinese society ages further. Population data released by the National Bureau of Statistics this January showed that 14.2 percent of the Chinese population was 65 and above in 2021, or what the PRC describes as a “deeply aging society” (深度老齡化社會). Meanwhile, China’s birth rate hit a 72-year low (7.18 percent), with a net population increase of only 480,000.

Table 1 (Source: National Bureau of Statistics)

As seen in Table 1, China’s birth population has been declining from a peak in 1987. From 2000 onwards (with the exception of 2012), the annual net population increase was less than 10 million. The bulk of potential home buyers in China now and for the next decade are likely to be born between 1987 and 2000 (ages 22 to 35). Demand for housing will increasingly drop off in the coming years even without the various ongoing property sector-related crises as fewer and fewer Chinese join the pool of potential home buyers given China’s current demographics. With the exception of first-tier cities, real estate markets in most cities are set to lose momentum as population problems kick in.

Housing oversupply troubles will become more prominent as the Chinese people turn away from buying property as investment. China’s real estate boom and the financialization of property occurred as a result of the CCP authorities’ releasing 4 trillion yuan in stimulus in the wake of the 2008 global financial crisis. The abundance of liquidity led to an intensification of infrastructure construction, as well as allowed local governments to issue more bonds and increase fiscal revenue through land sales. Meanwhile, highly-leveraged property developers rapidly inflated the property bubble through risky business and financial operations. In his second term, Xi Jinping sought to cool the property market and reduce financial risks through his “houses are for living in, not speculation” policies. Xi’s housing policies and the efforts to curb COVID-19 in the past two years contributed to the puncturing of the housing bubble, a development that is becoming more obvious from the high housing vacancy rate in China.

2. The trend of reducing housing demand and housing oversupply will exacerbate vicious cycles (see here and here) in China’s real estate crisis. As demand for land drops off sharply, local governments will generate significantly less revenue and will have even fewer funds to sustain grassroots operations and public services.

A recent example of local governments being unable to bankroll public services was seen in Zhoukou City in Henan Province. Mainland media reported that the Dancheng County Bus Company (henceforth referred to as Dancheng Bus) in Zhoukou City issued a notice on Aug. 12 stating that it would be suspending all urban bus services as it had not been able to pay wages to its drivers for several months due to “operational difficulties.” A Dancheng Bus manager told mainland media that a main reason for the company’s “operational difficulties” was that there were too few passengers and the relevant departments of the local government did not give them subsidies to tide them over the situation. As a result, the bus company was unable to pay its drivers and was forced to suspend services. Mainland media noted that another bus line in Guangdong’s Yangjiang City also suspended service this June over a shortage of funds.

3. Financial contagion from China’s real estate sector debt crisis is spreading to other sectors and affecting both upstream and downstream industries.

For instance, the Chinese language edition of Radio Free Asia reported on Aug. 10 that more than a dozen steel companies, including China Baosteel, Taiyuan Iron and Steel Group, and Shandong Steel, recently issued market outlook warnings. Those companies reported needing to cut or suspend production, slashing wages by 30 percent, and even laying off some workers. The steel industry also anticipates 30 percent of steel companies to eventually go bankrupt. Additionally, reduced steel production is contributing to reduced upstream coke production, sending coke prices tumbling by 40 percent. Coke companies in Shanxi, Inner Mongolia, and some other places are planning to shut down some furnaces given the current state of affairs, according to RFA’s report.

The case of Wuhan Rongqiao’s failure to make loan principal and interest repayments to Ping An Trust that was highlighted above is another example of spreading financial contagion.

Ping An Trust is a trust and investment company under Ping An Insurance. Ping An Trust did a lot of business with developers during the years of China’s real estate sector boom. The company’s annual reports in the years 2017 to 2019 listed its real estate trust assets as 100.633 billion yuan (15.42 percent of total trust assets), 134.800 billion yuan (25.24 percent), and 131.488 billion yuan (29.71 percent) respectively, reflecting a steady increase each year. Ping An Trust’s 2021 annual report, however, listed its real estate trust assets at 68.674 billion yuan, or down 47.8 percent from the 131.488 billion yuan in 2019. According to data from Chinese business information provider Qichacha, Ping An Trust has equity pledges with 145 companies at present, of which at least 53 are real estate developers.

China’s slumping property sector has also led to a sharp slowdown in China’s credit growth. Data released by the People’s Bank of China on Aug. 12 showed that renminbi loans increased by 679 billion yuan (about $10.1 billion) in July, or less than a quarter of the 2.81 trillion yuan increase in RMB loans in June. Of total loans, househouls loans grew by 121.7 billion yuan in July, much lower than the 848.2 billion yuan increase in June.

Declining household loans foreshadow a drop in real estate sales and a worsening of the property sector debt crisis and liquidity crunch. This trend will in turn worsen the financial crisis of small- and medium-sized banks in China and expand the PRC’s current financial risks.

4. The case of the Zhengzhou municipal government handing over money from its real estate relief fund to a commercial project instead of focusing on distressed residential projects underscores the deficiencies of the CCP’s authoritarian system and the officialdom’s Party culture. The Zhengzhou government’s move is worse than it seems considering that the funds that the PRC government is mobilizing to help out stalled projects are only a drop in the bucket when compared to the scale of the problem (as we previously analyzed), yet those scarce funds are not all going to needy projects (if at all). Zhengzhou City currently has the most number of mortgage boycotts over stalled projects (43) in the country, according to the Github tally.

If the current trajectory is maintained, Beijing will be helpless to stop economic problems from developing into serious social and political problems for the CCP regime.

     SinoInsight  2     

OUR TAKE
1. The appointment of Sun Maoli as vice minister of public security suggests that the Xi leadership could be looking to expand so-called “standardized law enforcement” to further rectify the public security system and strengthen Xi Jinping’s control over the Party’s “knife handle.”

The Xi leadership had earlier pushed for “standardized law enforcement” in the wake of the “Lei Yang Incident” in May 2016. On May 20, or about two weeks after the Incident, the 24th meeting of the leading group for comprehensively deepening reforms (which Xi Jinping presided over) passed an opinion on “standardizing law enforcement” (關於深化公安執法規範化建設的意見). Despite occasional meetings on the topic, the Xi leadership still struggled to rein in the public security system, which had long been in the grasp of the Jiang Zemin faction, and root out recalcitrant elements. The recent Tangshan restaurant incident in Hebei Province and the sudden and suspicious passing of newly appointed Hebei PSB director Liu Wenxi are signs that the Xi leadership faces stiff resistance in rectifying the public security system in some quarters.

Rumors circulating on Chinese social media claim that Liu Wenxi was stabbed to death by unknown assailants in a restroom, and did not die from a “sudden illness and failed attempt at treatment” per the official account. Days after Liu’s death, his wife and daughter also reportedly died from “sudden illness.” The “protective umbrellas” (corrupt officials who shelter criminals) of triad elements in Tangshan City were allegedly responsible for the murder of Liu Wenxi and his family, according to information circulating on Chinese social media.

Meanwhile, the purge of Guangxi PSB deputy director Tang Bin appears to be part of the Xi leadership’s broader effort to clean up the public security system in several areas. We previously analyzed (see here and here) that provincial PSB directors in Guangxi, Liaoning, and a number of other places were “moved from their longtime bases of operations (調虎離山) so that the Xi leadership can better investigate them in the future.”

Publicly available information shows that a number of leading PSB cadres in Guangxi and Liaoning have been purged in recent months:

• April 23: Lü Kaiwang (sub-bureau rank), former chief of the Guangxi PSB criminal investigation corps.
• April 30: Yuan Jianhui, former Party group member and vice mayor of the Guangxi Beihai Municipal government, and former Beihai Municipal PSB director.
• July 15: Zhu Zhongwei, deputy secretary of the Guangxi Police College.
• Aug. 5: Liu Jiaduo, deputy director of the Liaoning Provincial PSB.

2. The recent purge of mid-level regulators in Henan affirms our earlier analysis. We wrote: “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.”

Also, the investigation of financial system officials appears to be the Xi leadership’s indirect response to tackling China’s growing financial risks. As those risks rise, Xi Jinping will likely move to hold more officials accountable and purge them to preserve his power.

3. The investigation of SASAC officials and Xiang Zizhong from China Electronics Corporation appears to be part of the Xi leadership’s effort to (see here and here) hold officials responsible for the failure of Beijing’s semiconductor “great leap forward” (芯片大躍進) to take off despite substantial investments.

The CCP authorities investigated at least five SASAC officials in August, as well as several officials from other central and state-owned enterprises. Seeking accountability aside, Beijing could be looking to stem financial losses through the corruption of officials managing state-owned assets and preserve the regime amid mounting economic and financial difficulties.

4. Xi Jinping may have consolidated power to a very high degree during the past decade, but he is still struggling mightily to overcome the deficiencies of the CCP’s authoritarian system and Jiang Zemin’s legacy of “ruling the country through greed” (以貪治國). To resolve those deep-seated issues, Xi is again turning to the anti-corruption campaign to carry out “self-revolution” in the Party, “turn the knife inward,” and “scrape poison from bones.”

As this rhetoric would imply, there is a cost to “turning the knife inward” in embarking on “self-revolution.” Xi risks further alienating the CCP officialdom and escalating factional struggle in the Party elite as he steps up purges.