SinoInsight 1
Sept. 5
Mainland media outlet Yicai Global reported that more than 10 local governments recently introduced measures to help developers complete unfinished projects. Of those localities, the governments of Zhengzhou, Naning, Zhejiang, Hubei, Shaanxi, and some other areas are taking the lead in working with local non-performing asset management companies, local state-owned enterprises, and other state-owned capital to help property developers through bailout funds.
Sept. 7
The Zhengzhou City local government issued a notice announcing a 30-day “special action” to ensure the “full resumption of unfinished project construction” (鄭州市“大干30天, 確保全市停工樓盤全面復工”保交樓專項行動實施方案).
The notice required work on all stalled projects to “fully and continuously” resume before Oct. 6, and put forth five specific measures:
- Distressed developers should “effectively assume the main responsibility for self-rescue.” This includes returning misappropriated escrow funds through the disposal of undeveloped land, projects under construction, assets, company equity, etc.
- The government should use special loans appropriately to ensure the completion of projects and strengthen fund supervision. Developers that want to get special loans must pledge valid assets to government-back “platform companies” (SOEs, state-owned capital, etc.).
- Distressed developers are encouraged to file for bankruptcy and complete the disposal of insolvent real estate projects as soon as possible. Municipal and district courts should actively cooperate with the local government to quickly dispose of property company bankruptcy and reorganization cases.
- Organize relevant departments to conduct a special audit on the use of presale funds in escrow for unfinished projects, and formulate a disposal plan.
- Developers that have sufficient capacity to resume construction of unfinished projects are urged to resume work fully as soon as possible. Developers with more assets than liabilities but have temporary liquidity difficulties should let government platform companies take over construction first and accounts will be settled later. Developers with fewer assets than liabilities can follow the “substitute construction” (代建) method and let government platform companies take over construction; government auditors will later comprehensively audit such developers and hand over evidence of illegalities to the public security authorities.
The notice also proposed that leading Party and government officials in all districts of Zhengzhou should be assigned to and be responsible for handling one or two major stalled projects. Leading officials who have not ensured the full resumption of construction on unfinished projects before Oct. 6 will be reported and criticized.
The notice added that falsification, “performance-style,” and “symbolic” resumption of work are strictly prohibited, and those found doing so will be “seriously dealt with.”
Sept. 8
According to a crowdsourced list of unfinished projects on Github, there are 342 stalled projects in 119 cities. There are 69 stalled projects in Henan Province, of which 45 (65.2 percent) are in Zhengzhou City.
OUR TAKE
At a glance, local governments appear to be tapping into the CCP regime’s “authoritarian advantage” to address the stalled projects problem and resolve the woes of home buyers. Given the officialdom’s standard mode of operation, however, local government efforts to assist distressed developers in completing unfinished properties could end up worsening the problem in particular and the housing sector crisis in general in the long run.
The stalled projects problem is partly the fault of local government policies and actions stretching back many years. When the property sector was booming, local governments had issued presale permits for projects that were just 25 percent completed; around 80 percent of new home sales over the past 10 years were of homes that were partially built and with developers pledging to deliver the property in one to three years. Meanwhile, inadequate supervision of mortgages and down payments placed in escrow accounts that on paper were meant expressly to pay for the construction of buildings were siphoned off by developers, resulting in unfinished projects.
Home buyers have protested stalled projects before. But in the years when the Chinese economy was experiencing rapid growth, local governments had few qualms about resorting to heavy-handed tactics against buyers to “maintain stability” and for the most part turned a blind eye to the underlying problems (misuse of escrow funds, etc.).
Zhengzhou has had seven Party secretaries and eight mayors over the past two decades, but the current Party boss An Wei and mayor He Xiong were the first to focus their attention on the matter of unfinished projects. The current Zhengzhou leaders were also unlikely to have substantially worsened the problem beyond simply continuing the policies of their predecessors; both took office in January 2022 after their immediate predecessors were dismissed over their inept handling of massive floods in the city last July.
Yet Zhengzhou’s current top leaders almost certainly prioritized fixing the stalled projects problem because the central government has made it a priority. A July 28 meeting of the Politburo called for “compacting the responsibility of local governments to ensure the delivery of buildings and stabilize the people’s livelihood.” Like achieving “zero-COVID” and “eliminating extreme poverty,” local officials like those in Zhengzhou have a need to show that they are diligently resolving the problem of the unfinished projects to stay “politically correct” in the current regime climate and secure their careers.
The Zhengzhou local government faces an uphill battle in completing its “special action” to “fully resume unfinished project construction.” For one, developers and government-backed financial institutions need to have sufficient funding and willingness to “ensure the delivery of buildings.” However, some government-backed financial institutions are “wary of engaging with cash-strapped developers and later dealing with potential losses of their own” without “explicit financial backstop from Beijing,” according to an Aug. 25 Reuters report citing seven people with knowledge of the matter. And even if funding is secure and work “fully” commences by Oct. 6, there is no guarantee that the projects will be completed further down the road as the Chinese economy continues to deteriorate and the property sector crisis worsens. The Zhengzhou government also likely has to deal with “falsification,” “performance-style,” and “symbolic” resumption of work in some cases.
Then there is the issue of the local government using strong-arm tactics to “solve” one problem but worsening the overall situation. The five specific measures laid out by the Zhengzhou government leave room for the latter to take aggressive action in achieving the “full and continuous” resumption of work before Oct. 6. For instance, the local government could force developers to sell their assets and equity at low prices to government-backed financial institutions to pay for the completion of stalled projects. The local government could even open criminal investigations into developers over the misappropriation of funds from escrow accounts (possibly even in cases where no funds were misused) and compel them to “return” those funds from other projects so that the unfinished projects on hand can be completed. Both examples could lead to the delivery of some projects, but could worsen the liquidity situation for distressed developers and result in the stalling of even more projects in the future.
Government corruption is another problem. Some officials could take advantage of the “special action” to pocket some of the proceeds from the sale of developer assets and equity to government-backed financial institutions. This could compound problems for troubled developers as they may not have enough money left over to complete buildings and no good way of raising more funds. Chronic liquidity shortage among developers will lead to more unfinished projects.
SinoInsight 2
Bloomberg News reported that the bulk of foreign direct investment (FDI) to China actually comes from Hong Kong because mainland companies there have been “round-tripping” funds through the city. A Bloomberg analysis of government data found that Hong Kong was the source of 76 percent of all “actually utilized” FDI in 2021, and if the ratio holds, estimated that 607 billion yuan of the 798 billion yuan of foreign investment to China so far in 2022 is “round-tripped” from Hong Kong. The CCP earlier reported a 17.3 percent growth in FDI in the first seven months of this year.
Bloomberg also noted that three-quarters of new investment to China went to the service sector instead of manufacturing, which the PRC authorities are promoting to grow the “real” economy and move the Chinese economy towards higher-value production.
Sept. 7
The PRC General Administration of Customs released China’s trade data for August and the first eight months of the year.
In dollar terms, cumulative exports from January to August increased by 13.5 percent and imports were up 4.6 percent from a year ago. China’s trade surplus increased 56.7 percent to $560.52 billion over the same period. In August, exports grew 7.1 percent year-on-year, imports increased by 0.3 percent, and the trade surplus went up 34.1 percent to $79.39 billion; this is compared with exports up 18 percent year-on-year, imports up 2.3 percent, and the trade surplus standing at $101.26 billion in July.
In renminbi, China’s exports from January to August increased by 14.2 percent year-on-year, imports grew by 5.2 percent, and the trade surplus went up 58.2 percent to 3.66 trillion yuan. In August, exports were up 11.8 percent from a year ago, imports increased by 4.6 percent, and the trade surplus grew 42.4 percent to 535.91 billion yuan; this is compared with exports up 23.9 percent year-on-year, imports up 7.4 percent, and the trade surplus standing at 682.69 billion yuan in July.
China’s shipment of goods to the rest of the world in August grew by 7.1 percent from the previous year to $314.9 billion, the weakest gain since April this year. This was below a median forecast of 12.5 percent among economists polled by The Wall Street Journal. Economists also expected imports to rise by 1.5 percent and the trade surplus to be $933 billion in August.
Sept. 9
China’s consumer price index (CPI) rose 2.5 percent in August from a year ago according to National Bureau of Statistics data, down from 2.7 percent in July. Analyst polls by The Wall Street Journal and Reuters expected the August CPI to be 2.8 percent.
The slowdown in inflation reflects weak domestic demand.
OUR TAKE
The information above shows that China’s “troika” of growth drivers (investments, consumption, exports) is steadily weakening, a trend that looks likely to persist and worsen over the long-term in considering the domestic and global situation. We previously went over the development of domestic “vicious cycles” (here and here for example) in China and how they are dragging down the economy. Here we will look at some global developments affecting the Chinese economy.
Global demand is slowing due to the pandemic, rising inflation, and recessionary trends. In August, the JPMorgan Global Composite PMI fell to 49.3 from 50.8 in July, with output contracting in the manufacturing and service sectors (first contraction in both categories since June 2020). Meanwhile, the S&P Global U.S. manufacturing PMI fell 0.7 to 51.5 in August, the lowest since July 2020; the Euro area manufacturing PMI fell to 49.6 in August compared to 49.8 in July; and Germany’s manufacturing PMI fell to 49.1 in August, or two consecutive months of contraction and the lowest since June 2020.
Weakening global demand is also reflected in plummeting freight rates. Freight rates are falling as market conditions shift from earlier in the pandemic, ports clear their backlog of shipments from China, and energy prices climb up. For instance, the cost of shipping a 40-foot container from China to the West Coast of the United States is around $5,400 a box in early September (down 60 percent from January 2022), and around $9,000 for shipping from Asia to Europe (down 42 percent from January 2022), according to Freightos Baltic Index. The rate for both routes peaked at over $20,000 in September 2021. Shipowners and analysts expect rates to fall later this year and in 2023, according to a Wall Street Journal report.
Beijing’s “zero-COVID” policy and concerns about China’s geopolitical risks have also convinced companies to shift part of their supply chain from the mainland. For instance, Apple will be manufacturing some of its new iPhone 14s in India, and is looking to make Apple Watches and MacBooks in Vietnam. Apple suppliers like Luxshare Precision, Lens Technology, GoerTek, Sunwoda Electronic, and Q Technology have also started building factories in India and Southeast Asia to reduce their reliance on producing on the mainland, according to various media reports. While more than 90 percent of Apple products are still made in China, the CCP’s persistence with its current domestic and foreign policies will likely in time lead Apple, its suppliers, and other foreign manufacturers to further diversify their production away from China.
As global demand shrinks, the world’s reliance on China recedes, and China becomes a less attractive destination for foreign investment, Western countries and international organizations could become less hesitant about taking a tougher stance against Xi Jinping and the PRC.
On human rights, the United Nations released a report on Aug. 31 accusing China of “serious human rights violations” and committing “crime against humanity” in Xinjiang. The UN report led several countries to criticize the PRC, including the usually neutral Switzerland who summoned the PRC ambassador for a meeting to express concern about the human rights situation in Xinjiang. Switzerland was always relatively pro-Beijing, being one of the first Western countries to recognize the PRC in 1950 and having entered into a secretive deal with the regime in 2015 to allow PRC officials to travel to the country and interrogate Chinese nationals set for deportation.
On trade and investments, the Biden administration has been delaying a decision to remove the Trump administration’s China tariffs and is restricting the sale of some advanced chips to China. Meanwhile, the German economic ministry is considering “a raft of measures to make business with China less attractive as it seeks to reduce its dependency on Asia’s economic superpower,” according to a Sept. 8 Reuters report. The measures could include reducing or canceling investment and export guarantees for China, halting the promotion of trade fairs and manager training in China, redirecting loans from state lender KfW to other Asian countries, screening Chinese investments in Germany and German investments in China, and submitting a complaint to the World Trade Organization about unfair PRC trade practices together with G7 countries.
And on Taiwan, lawmakers from the U.S. and other democracies have been visiting Taipei with increased frequency since House Speaker Nancy Pelosi traveled there in early August. Other countries have also become more willing to show support for Taiwan despite the PRC stepping up military maneuvers around the island following Pelosi’s visit.
Growing global wariness toward the PRC and China’s declining economy will translate into rising political risks for Xi Jinping. Xi is by no means politically secure even if he manages to extend his tenure at the 20th Party Congress and consolidate power to an even greater degree.
