1 Shadow banking risks grow in China
Nov. 14
Mainland media reported that Huisheng Private Equity Securities Fund Management, a Hangzhou-based private equity fund, had allegedly defrauded China Soft New Momentum, a Beijing-based manager of fund of funds with more than 10 billion yuan under management that mainly serves institutional investors such as banks, state-owned enterprises, listed companies, and family offices.
A screenshot circulating on social media claimed that China Soft New Momentum had invested in Huisheng but the latter allegedly fabricated its business performance. China Soft New Momentum also noted in a statement that it had trouble redeeming assets that were allocated to Huisheng’s private equity products due to the latter’s defaults.
Mainland media Yicai reported that trust companies in China had been reassessing their risks after the China Soft New Momentum fraud incident. Yunnan International Trust told Yicai that it had conducted risk checks, and people familiar with the matter said that Yunnan International Trust had around 1 billion yuan tied to Huisheng. Yicai added that one of the involved companies had allocated up to 3 billion to Huisheng.
On Nov. 24, the China Securities Regulatory Commission announced on its website that it had decided to launch an investigation into the parties involved in the China Soft New Momentum fraud incident, including Hangzhou Yuyao, Shenzhen Huisheng, and other private equity institutions. The CSRC said that public security organs have already intervened to place under control the personnel involved in the case.
Nov. 18
Mainland media outlets reported that the boss of Luoke Capital (sometimes written as “Lock Capital”), a Chinese private equity investment firm that handled over 10 billion yuan in assets, is allegedly on the run and that the news is spreading across the industry.
Mainland media cited a Weibo user’s post as saying that Luoke Capital’s Zhang Yinghao had instructed his driver to take him to the Hong Kong Port on Nov. 11 and wrote in his company’s group chat in the evening of Nov. 14, “I’m leaving, and you all should too.” Zhang later became uncontactable and was found to have absconded with a huge sum of money after Luoke Capital employees made a police report on the night of Nov. 14.
The Weibo user alleged that Zhang took as much as 1.2 billion yuan of customer funds from his company, with the funds coming from about 500 investors and a significant portion from pensions from the elderly people in Guangdong’s Dongguan City. The user added that there were no signs that Zhang was looking to abscond before he became uncontactable.
Luoke Capital is part of Luoke Group. Luoke Capital had 16 private equity funds under management, of which 12 are still operating and four have undergone liquidation. Luoke Capital had over 17 billion yuan under management in 2022, and the company ranked 15th among the top thirty best new energy and new materials investment institutions in China in September 2023.
Luoke Capital’s founder and chairman Zhang Yinghao had worked in China’s investment industry for a decade. Before Luoke Capital, Zhang did investment risk control work at Ping An Group. Zhang also previously worked for Goldman Sachs’ China asset management department and Shengfu Capital’s (盛富資本) investment department.
Nov. 22
Leading Chinese wealth manager Zhongzhi Enterprise Group told investors in a letter that it is heavily insolvent, according to mainland media reports.
“Initial inspections show that the group is seriously insolvent and has significant continuing operational risks. The resources available for debt repayment in the short term are much lower than the group’s overall debt scale,” Zhongzhi wrote. “The Zhongzhi group deeply apologizes for the losses caused to investors. We fully understand the urgency, importance, and seriousness of resolving this overall risk.”
Zhongzhi wrote that it had total liabilities of about 420 billion yuan to 460 billion yuan, as compared to the company’s estimated total assets of about 200 billion yuan. Zhongzhi also wrote in the letter that as its assets were concentrated in long-term debt and equity investments, it would be difficult to liquidate them and book the returns.
Sun Jianbo, the founder of Beijing-based asset manager China Vision Capital, told Bloomberg News, “The government will have to step in to help [Zhongzhi], and make sure the asset disposal will be conducted in an open and fair approach.” He added that bad assets are typically sold with a 70 percent discount, and “for investors, it’s a lesson with huge costs.”
Nov. 23
Bloomberg reported that the PRC authorities are considering allowing banks to issue so-called working capital loans to some developers, citing people familiar with the matter.
The people said that the new financing facility would not require developers to post land or assets as collateral and be available for day-to-day operation purposes, which would “potentially free up capital for debt repayment.” The people added that officials are also considering a mechanism that would allow a bank to take the lead on supporting a specific distressed developer by coordinating with other creditors on financing plans.
The people said that the implementation of the measures would require regulators to exempt bankers from being held accountable for potential bad loans given the high risks involved.
Bloomberg noted that if the measures are approved, “they would represent China’s most forceful attempt yet to plug an estimated $446 billion shortfall in funding needed to stabilize the industry and deliver millions of uncompleted homes.”
Nov. 25
The Chaoyang Public Security Bureau in Beijing Municipality announced in a social media post that it had opened a probe into Zhongzhi Enterprise Group. The public security authorities said that Zhongzhi was suspected of committing “illegal crimes” and that “mandatory criminal measures” have been placed on a number of suspects, including a person surnamed Xie and others.
The Chaoyang PSB did not state the suspects’ alleged crimes or provide details of the measures being taken. Mainland media speculated that the person surnamed Xie who is being investigated could be a relative of Zhongzhi founder Xie Zhikun.
The Chaoyang PSB post said that “investors are requested to actively cooperate with the police in investigating and collecting evidence and safeguard their rights and interests through legal channels.”
Our take
1. The increasing exposure of shadow banking risks in China is a sign of spreading financial contagion from the real estate debt crisis.
Shadow banking in China grew rapidly after the PRC authorities during the Jiang-Hu era issued its 4 trillion yuan stimulus package to lessen the impact of the 2007 global financial crisis on the Chinese economy. The surge in liquidity led to an expansion of asset bubbles, as well as artificially inflated land prices, home prices, and commodity prices. China’s economy also shifted from the “real” towards “financialization,” with large amounts of funds flowing towards the high-yield real estate sector.
After Xi Jinping took power, he sought to reverse the trend of economic financialization and instead grow the “real” economy. Xi summed up the so-called “three major imbalances” of China’s economic operations in a speech at the Central Economic Work Conference in December 2016, and the Xi leadership would later restrict the flow of funds to the real estate sector through the “three red lines” and other policies. The Xi leadership’s measures, however, would end up increasing the exposure of shadow banks to the property sector as developers turned to other channels for funding, and the real estate sector debt crisis triggered by China Evergrande is now triggering the risks of shadow banks.
2. Beijing’s various measures so far to tackle the real estate sector crisis and mitigate the impact of a “hard landing” are more likely to exacerbate existing problems rather than alleviate the situation.
First, the Xi leadership’s effort to step up financial risk prevention and control, including through the anti-corruption drive, will cast a chill over the financial sector and cause investors to lose confidence. Increased pessimism could lead to the worsening of financial problems and leave financial institutions in a worse position to help distressed property developers. The resulting vicious cycles will eventually develop into a full-blown financial crisis for the CCP regime.
Second, Beijing’s measures to get financial institutions to keep lending to real estate companies will merely heighten the risks of those institutions and the financial system at large. We previously looked at the so-called “three no lower than” policy and what it entails in the Nov. 24, 2023 newsletter. Bloomberg’s Nov. 23 report about the PRC authorities considering the approval of unsecured loans to developers is another measure that would only increase bad debts and the risks of financial institutions; banks are reluctant to lend to developers precisely because home prices are declining in China and there is a risk of depreciation in the value of collateral.
Beijing’s “forceful attempt” to provide funding to property developers is even riskier in considering its own assessment of the current situation. A document on the opinions and suggestions of the PRC’s financial work situation report published on the National People’s Congress website on Nov. 22 noted that some attendees of the meeting from which the document was compiled suggested that the authorities should look for problems such as inadequate internal management and corruption in financial institutions that lend to large real estate enterprises that defaulted on their debts. Some of the attendees also believed that some small and medium-sized financial institutions had padded their figures and those figures do not reflect the actual situation. Those attendees recommended that the central financial regulatory authorities identify existing risks in a timely manner, accelerate the disposal of non-performing assets, and consolidate capital.
3. The shadow banking problems in China that have been materializing this year are precisely what Xi Jinping warned about in an internal meeting with senior officials in February. Xi said, “Now, various risks and dangers are highly correlated, strongly linked, and rapidly transmitted. A little carelessness can cause a butterfly effect.”
Xi added, “Small risks will become big risks, regional risks will become general risks, and economic and social risks will become political risks.”
2 Analyzing the anti-Xi camp’s targeting of Xi post-APEC
Political rumors aimed at Xi
Nov. 21
Australian author Gregory R. Copley claimed in a piece on Oilprice.com that a “significant source in the PRC” told him that Xi Jinping had “formally asked” President Joe Biden to arrange an “urgent $900 billion bailout for the communist Chinese economy.” Copley said that the information “came from within the CCP, from elements anxious to bring down Xi Jinping, and they confirmed that the effort to remove Xi was now reaching a level of imminent action.”
Copley also alleged that Xi went into his meeting with Biden on the sidelines of the Asia-Pacific Economic Conference in San Francisco against the backdrop of being “now left isolated within the Party as to why he had dissipated so much of communist China’s — and the CCP’s — treasure, and left the country on the verge of a new revolution.” Copley added that Xi “was facing imminent removal by the Party — anxious to save itself, as well — and the PLA.”
Copley further noted that Xi was “forced, in San Francisco, to abandon the pretense that the PLA was ready to conquer Taiwan.”
Nov. 23
Nikkei Asia columnist Katsuji Nakazawa claimed that Xi Jinping’s remarks to Biden about having no plans to invade Taiwan in 2027 or 2035 are part of a “careful and farsighted” strategy and a calculation of their effects on domestic politics, citing a source familiar with PRC domestic politics. The source added that it was also strategic for Xi to note that he knows what U.S. officials have been talking about.
Nakazawa’s source added that Xi mentioning the 2027 and 2035 dates indicate that he “plans to continue for much longer, and he chose to convey that message to Biden.” Nakazawa added that the 2035 mention “even suggests Xi’s ambition is to be China’s top leader for the rest of his life.” Nakazawa then contrasted Xi’s “wishes for his political career” with Jiang Zemin, noting that the latter allegedly hinted to senior officials from Japan’s ruling coalition who visited Zhongnanhai in May 2000 that he was going to retire.
Nakazawa added that Xi’s “bold move” did not reflect his confidence after acquiring “ultimate power” at home, noting that Xi has “come under increasing pressure from within the Party and the general public amid China’s dire economic circumstances.” To “break through the difficult political situation back home, Xi needed to send a message regarding Taiwan and show confidence that he would be in charge for more than a decade to come … The true purpose of his traveling to the U.S. might have been to make that highly political declaration and then spread it to the rest of the world, including China.”
Persecution guilt
Nov. 16
Minghui.org, a U.S.-based website that serves as a clearinghouse for information about the persecution of Falun Gong in China, wrote in a report about activities by Falun Gong adherents in San Francisco during the week of the APEC summit that “Xi Jinping bears unshirkable responsibility for the Falun Gong practitioners who were persecuted to death during his time in office.”
This was the first time that Minghui explicitly named Xi as being accountable for the persecution campaign that Jiang Zemin ordered and his cronies perpetuated. Minghui continued to hold Jiang, Luo Gan, Zeng Qinghong, Zhou Yongkang, and others in their group responsible for the persecution in the report.
Our take
1. The “Party insider” information and analysis about Xi Jinping’s current political situation that is found in the two Western media columns listed above are hugely lacking in believability.
The claim by the “significant source in the PRC” in Gregory R. Copley’s piece for Oilprice.com that Xi had formally requested an “urgent $900 billion bailout” from President Joe Biden is absurd on several levels.
For one, the Xi leadership still echoes the CCP’s propaganda about the importance of sovereignty and “century of humiliation,” and promotes the notion of “the East is Rising, the West is in Decline.” Seeking a $900 billion bailout from the U.S. would torpedo Beijing’s current strategic and propaganda agendas, as well as have Xi critically undermine his own “quan wei” (authority and prestige) by essentially ceding Chinese sovereignty to the West by voluntarily placing the country under a form of “neocolonialism.” There are no signs yet that Xi has been pushed to the brink of desperation and is forced to contemplate illogical moves with extremely low probabilities of success and a high probability of political suicide. Nor would Xi be likely to make a request that exposes his and the PRC’s massive weaknesses and possibly embolden the U.S. and its allies to push for leadership or regime change in China during this critical period.
Xi would also know that he would be laughed out of the room for asking Biden for a bailout under the current geopolitical climate. The Biden administration has continued parts of the Trump administration’s initiatives to counter China and has been taking steps to curb the PRC’s expansion and technological development as it looks to protect U.S. national security. Unless the Biden administration has a political deathwish, it would not grant an “urgent $900 billion bailout” to the Xi leadership under any circumstances to avoid propping up a regime that Secretary of State Antony Blinken identified as “the most significant long-term challenge” to the U.S. in a major policy speech at the Johns Hopkins School of Advanced International Studies in September 2023.
Biden would not be able to hand over $900 billion in aid to Xi even if he were willing to. The amount dwarfs the total amount that the U.S. gives in foreign aid each year; in 2022, the U.S. is estimated to have given $66 billion in foreign aid. Not even international financial institutions would be able to realistically help Biden fulfill Xi’s alleged bailout request; as of the end of June 2023, the International Monetary Fund had total resources of about SDR 983 billion, which translates into a capacity for lending of about SDR 696 billion (about $925 billion). Of course, the $900 billion could be disbursed over several years, but Copley’s source does not say whether this is so and the “urgent” nature of the bailout suggests that funds are needed sooner rather than later.
Meanwhile, Nikkei Asia columnist Katsuji Nakazawa’s analysis that Xi Jinping’s remarks to President Biden that he has no plans to invade Taiwan in 2027 or 2035 are a coded reference of sorts of Xi’s plan to stay in office for life appear to be overreading more so than a nuanced parsing of Xi’s intent. Also, Nakazawa’s attempt to contrast Xi’s “ambition” to “be China’s top leader for the rest of his life” with Jiang Zemin’s supposed hint that he was going to retire is disingenuous. Jiang did not immediately cede all his positions to Hu Jintao after stepping down as Party boss in 2002 (Jiang retained the Central Military Commission chairman position until 2005) and continued to “hijack” his successor’s tenure by exploiting the “collective leadership” system and the many Jiang faction officials in the top leadership and other key posts in the regime.
It is noteworthy that both Nakazawa and Copley’s columns contain an anti-Xi bias. Copley wrote that his Party insider information came from “elements anxious to bring down Xi Jinping.” Meanwhile, Nakazawa framed the information in his piece to make Xi look bad and Jiang come out favorably; on a related note, we previously observed in our Oct. 2, 2023 newsletter, Nakazawa’s sources “have a tendency to disclose information that is mostly positive about the Jiang faction and negative about Xi and his camp.”
It cannot be ruled out that Xi’s remaining factional rivals and others in the broader “anti-Xi coalition” are attempting to carry out political mobilization against Xi Jinping by working through Western media outlets. These “attacks” on Xi, however, are relatively feeble and are much less credible than the rumors about CCP elite politics that sometimes circulate on social media or are published in Hong Kong or overseas Chinese language media. These “attacks” also suggest that Xi’s lingering opposition is greatly lacking in political strength and influence as compared to Xi’s early years in office, but have not given up on pushing back against the PRC leader.
2. The Jiang faction and the “anti-Xi coalition” presently have insufficient political strength to openly challenge Xi Jinping. But conditions are shifting in favor of Xi’s domestic enemies to take drastic action to oust Xi when opportune moments arise, while Xi’s advantages in the factional struggle are rapidly vanishing.
For one, the worsening real estate sector debt crisis and China’s rapidly deteriorating economy are saddling the Xi leadership with an intractable slew of existential economic, financial, and social problems. A sharp escalation of any one of those problems could quickly translate into critical political troubles for the CCP, which in turn could produce political Black Swans that present Xi’s enemies with opportunities to openly demand that the latter step aside to preserve the Party and the regime.
Xi is also losing opportunities to absolve himself of blame for the regime’s ills by denouncing the “incorrect line” of Jiang Zemin and holding the Jiang faction accountable. Jiang’s death in November 2022 and Xi’s eulogy for Jiang make it much harder now for Xi to fault his predecessor without also eroding his own “quan wei.” Further, Xi’s lack of action thus far in eliminating the remnant Jiang faction and condemning Jiang’s political legacies means that he is increasingly less able to escape accountability for the malign deeds of his deceased rival, as seen from the Nov. 16 Minghui.org report. The passage of Article 23 in Hong Kong in 2024 would only reinforce perceptions that Xi has chosen to “inherit” Jiang Zemin’s persecution of Falun Gong and other political legacies, and would afford the remnant Jiang faction more leverage with which to influence various groups to attack Xi and lay the narrative groundwork for his removal when the political conditions are ripe.
