1 China’s property crisis contagion continues to spread to financial institutions
Bad property loans spike for Chinese banks
April 9
The Chinese language edition of Nikkei reported that China’s real estate problems are becoming increasingly evident from the financial statements of local banks. Nikkei’s analysis of financial reports of 27 quasi-large and medium-sized Chinese banks listed in Hong Kong found that those banks had 106.8 billion yuan in real estate non-performing loans, up 27 percent from a year ago. Nikkei also found that average real estate non-performing loans reached 6.5 percent, an increase of 2 percent from the same period in 2023.
According to Nikkei’s findings:
- Jilin Jiutai Rural Commercial Bank saw its bad property debts rise by 37.3 percent to 162.8 million yuan. Meanwhile, the bank’s net profit fell 90 percent from a year ago to 168.3 million yuan.
- Jinzhou Bank in Liaoning Province will be delisted on April 15 and did not publish its annual financial report. The bank’s ratio of bad property debts exceeded 10 percent at the end of June 2022.
- Guizhou Bank saw a nearly 50 percent increase in bad property loans and its non-performing loan ratio reached 40 percent.
Huishang Bank and Jiujian Bank reported non-performing loan ratios of 7 percent to 8 percent respectively.
According to Nikkei Asia:
- The Bank of Qingdao in Shandong Province saw a 2,239 percent increase in bad property debts from 2022 to 2023, reaching 521.6 million yuan.
- The 31 Hong Kong-listed Chinese banks reported a 9.83 percent rise in bad property loans in 2023, reaching 291.2 billion yuan. Six of the banks reported a triple-digit percentage increase in bad loans, while 17 reported single to double-digit bad loans growth. Total non-performing loans of the 31 banks (including corporate and individual) rose 4.19 percent to 2.4 trillion yuan.
Nikkei reported that government-owned asset management companies have been actively purchasing bad loans from Chinese banks. For instance, Cinda Asset Management acquired about 89 billion yuan worth of non-performing loans from 79 small to medium-sized Chinese banks in 2023, an increase of 199 percent from 2022.
Ping An misses repayment on trust product
April 8
Individuals who bought a trust product from Ping An Insurance’s subsidiary Ping An Trust gathered outside the latter’s headquarters in Shenzhen to demand their money after Ping An Trust missed a repayment. The Shenzhen local authorities dispatched riot police to the scene for “stability maintenance” work.
April 10
Ping An Trust said in a statement that it has delayed repayment of its “Funing 615” trust plan “due to the overall downturn in the property market.”
Mainland media reported that the “Funing 615” trust plan was launched on Sept. 29, 2021, raised 772 million yuan, and matured on March 29, 2024. A sizable portion of the funds in the plan was invested in a property project that is not selling well, while several of the developers involved have defaulted on multiple debts.
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Ping An Insurance has long been known as a “hidden real estate giant” due to its heavy investments in the property sector when the market was booming. In 2019, the company’s trust asset size reached 4.43 trillion yuan, with real estate accounting for nearly a third (1.315 trillion yuan) of its portfolio. Ping An Insurance suffered losses after the outbreak of the real estate debt crisis in 2021 and had to scale back its property sector investments significantly. By 2022, the company’s trust asset size reached 5.520 trillion yuan, of which real estate only accounted for 4.63 percent (255.49 billion yuan).
Ping An Trust reported 14.55 billion yuan in revenue and had 662.5 billion yuan of assets under management at the end of December 2023, according to its financial report.
Information circulating on Chinese social media shows that Ping An Trust’s clients sent a letter to the Shenzhen municipal authorities noting that the company had defaulted on 37 trust products, involving as much as 10.3 billion yuan and 3,891 individuals.
Data from mainland trust monitoring website usetrust.com showed:
- In 2021, defaults in real estate trust products reached 91.711 billion yuan, or 61.34 percent of all defaults in trust products.
- In 2022, 115 real estate trust products worth 930.25 billion yuan defaulted.
- In 2023, 107 real estate trust products worth 486.42 billion yuan defaulted.
- Twelve real estate trust products worth 142.23 billion yuan have defaulted so far in 2024.
Shanghai asset management company ceases operations after top executives flee the country
April 9
Shanghai HHSC Capital Management (henceforth referred to as HHSC Capital) announced that it and its affiliates are severely insolvent, face significant operational risks, and are unable to meet their obligations (including payments).
April 10
The Yangpu Branch of the Shanghai Public Security Bureau announced that it had opened investigations into suspected illegal fundraising activities involving companies under the “HHSC group” like HHSC Capital and HHSC Asset Management. The bureau added that several suspects have been placed under “criminal coercive measures” (i.e. summons, release on bail and residential surveillance, detention and arrest).
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Mainland media reported that HHSC companies are collectively referred to colloquially as the “HHSC group.” Also, HHSC companies are defaulting because they are heavily involved with local government financing vehicles, including helping LGFVs secure financing while earning intermediary fees off providing the service. At the peak, the “HHSC group” issued as much as 30 billion yuan worth of LGFV asset management products.
Mainland media reported that HHSC companies did not have sufficient funds to meet the maturity obligations of certain products back in August 2023. In the evening of Aug. 25, 2023, Lin Qiang, the actual controller, chairman, and CEO of HHSC, gathered with other HHSC executives in Hong Kong and fled the PRC. Sources told mainland media that Lin’s wife and children went to Singapore about a month before he disappeared, and his parents did the same thing a week after he absconded. After leaving Hong Kong, Lin reportedly continued to use underground banks to expedite the transfer of funds overseas.
Mainland media added that HHSC companies slowed down its repayment of clients significantly after his departure. The current repayment rate of HHSC products is 13 percent, while overdue payments exceed 4.5 billion yuan.
External firms take over running of Minsheng Trust’s services
April 11
Minsheng Trust announced that CITIC Trust and Huarong International Trust had been appointed to provide operational and management services for the company.
Mainland media reported that Minsheng Trust had in recent years delayed repayments of certain products, faced continuous litigation, and announced net losses for several consecutive years.
Major state-owned trust company defaulting on repayments
April 12
Minmetals Capital announced that its subsidiary Minmetals International Trust was overdue in making repayments on three Kunming local government trust products. The three products, which total nearly 650 million yuan, are all government credit projects with various Kunming LGFVs serving as financing parties and guarantors, according to mainland media. The bulk of the Kunming LGFVs involved with the products are either subjected to law enforcement measures or are defaulting on debts and financial obligations.
Minmetals Trust is a non-banking financial institution specializing in trust services. Its parent company China Minmetals Corporation is directly supervised by the State-owned Assets Supervision and Administration Commission.
Minmetals Trust won the first and second China Trust Industry Golden Bull Awards in 2022 and 2023. As of June 2023, Minmetals Trust had accumulated 6.73 trillion yuan in managed assets, with outstanding trust assets under management totaling 718.606 billion yuan.
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Mainland media reported that Yunnan, one of 12 debt-ridden provinces identified by the central authorities as being “high risk,” is focusing its debt restructuring efforts on Kunming City. In turn, Kunming is focusing its debt restructuring on its LGFVs.
Minsheng Securities noted in a recent report that Kunming has 26 debt issuance LGFVs, including 16 at the prefecture level, three at the county level, and 7 in national-level industrial parks. The city’s LGFVs have issued over 450 billion yuan in interest-bearing debt, 2024 seeing a concentration of debt maturities.
Our take
1. The significant increase in property-related non-performing loans held by Chinese banks is a sign of financial contagion spreading from the real estate sector.
Lending to real estate companies was a major source of profit for small and medium-sized banks during the peak of the real estate boom in China. For instance, Shengjing Bank, which ran into trouble in 2023 and had to sell a portfolio of assets to the state-owned Liaoning Asset Management, had little involvement in real estate lending until the property boom. Shengjing Bank would later provide loans totaling 32.595 billion yuan to China Evergrande between 2020 and 2021, or an amount nearly equal to the bank’s total revenue for three years. Shengjing Bank’s real estate lending business also significantly increased during the housing boom; the bank’s property loans reached 35.28 billion yuan in 2019 and soared to 70.05 billion yuan in 2020, with a large portion of the increase going to Evergrande.
2. Ping An Trust missing a repayment on a real estate-linked product is another example of the property sector crisis spreading to the financial system.
Ping An Insurance relied on investing in leading Chinese real estate companies to boost profit after the PRC authorities lifted restrictions on insurance firms investing in the property sector in 2010. Ping An continued to invest heavily in real estate enterprises until Evergrande began defaulting on its bonds in 2021. We warned at the time that Evergrande’s problems were surfacing that its debt crisis “could yet expand and escalate risks of financial contagion.”
Chinese trust companies still have substantial investments in the real estate sector even though they began cutting those investments after the property bubble began to burst. Primary business data gathered by China Trustee Association for the end of the third quarter of 2023 that was released in early January this year showed that 6.21 percent (more than 1 trillion yuan) of China’s 22.64 trillion yuan in trust assets was invested in real estate. In comparison, 13.97 percent (2.28 trillion yuan) of China’s 20.49 trillion yuan in trust assets were real estate investments at the end of 2020.
3. HHSC Capital and Minmetals Trust’s repayment problems hint at the growing troubles of LGFVs and the PRC authorities’ increasing difficulties in covering up the debt crisis.
Kunming’s LGFV debt troubles were exposed in May 2023 and the products that Minmetals Trust is overdue in making repayments for will add to the problems plaguing Kunming LGFVs. Yet Kunming LGFVs are not facing the most severe debt issues. Yuekai Securities published a report on Jan. 28, 2023 which found that nearly 70 percent of the bonds issued by LGFVs in the 31 provincial-level regions were used for refinancing and over 90 percent were used to make debt repayments. Yunnan Province where Kunming is situated ranked fifth in terms of the proportion of LGFV bonds issued for refinancing (89 percent), or behind Qinghai (100 percent), Ningxia (95.2 percent), Guizhou (94.9 percent), and Tianjin (90.3 percent).
Regions where a lower proportion of LGFV bonds were used for refinancing do not necessarily have lower risks. For instance, LGFVs in Hainan Province issued the lowest proportion of refinancing bonds (26.3 percent), but used the remainder of its bonds to pay off interest-bearing debts. Meanwhile, virtually all of the remainder of the bonds issued by LGFVs in Ningxia, Guizhou, and Tianjin that were not used for refinancing went toward debt repayment. Also, Hubei was the only provincial-level region where more than 5 percent of LGFV bonds were used for project construction (5.6 percent), while LGFVs in 11 of the 31 provincial-level regions issued no bonds for project construction.
The Yuekai Securities report further noted that as much as 30.037 trillion yuan worth of LGFV bonds were maturing in 2024, accounting for 25.5 percent of all outstanding LGFV bonds. This suggests that local governments will experience greater difficulties refinancing LGFV bonds as more trust companies default on products involving LGFV bonds. More LGFVs will default this year if they cannot “borrow new to repay old” and refinance their bonds.
4. The various developments listed above indicate that the PRC authorities’ effort to have financial institutions help alleviate some of the local government and real estate debt problems to delay a concentrated outbreak of risks is limited in its effectiveness.
In the fourth quarter of 2023, the PRC authorities allowed the issuance of nearly 1.4 trillion yuan in special refinancing bonds to ease local government liquidity issues, as well as issued an additional 1 trillion yuan of government bonds. Local governments issued 730 billion yuan worth of refinancing bonds in the first quarter of 2024.
Meanwhile, the Ministry of Housing and Urban-Rural Development and the National Financial Regulatory Administration required commercial banks to provide financing to “whitelisted” real estate projects in January 2024 as part of a coordination mechanism for urban real estate financing. As of March 31, a total of 1,979 “whitelisted” projects received bank credit totaling 469.03 billion yuan.
Despite the fiscal support, the PRC authorities have been unable to avert defaults on trust products involving LGFV bonds or ease the “hard landing” of the real estate sector. Instead, Beijing’s measures are adding to the regime’s financial risks, and such risks could yet blow up in a concentrated fashion later this year.
Current trends are developing in a direction that we anticipated in our 2024 China Outlook. Unless Beijing manages to devise and implement effective policies to reverse China’s economic downturn and defuse geopolitical tensions, the regime’s economic problems will result in serious social and political issues for Xi Jinping and the CCP.
2 US clarifies its ‘red lines’ to the PRC
Campbell states US ‘strategic interest’
April 9
In a discussion with National Committee on US-China Relations president Stephen Orlins, U.S. Deputy Secretary of State Kurt Campbell said, “For the United States … our most important mission, historically, has been the maintenance of peace and stability in Europe … The point that we’re trying to make to Chinese interlocutors is that this is our strategic interest. This is the most central issue, and China is involving themselves in a way that they think that we don’t completely understand.”
Campbell also noted that Beijing had decided “to provide the necessary wherewithal in terms of machine tools, joint use capabilities, a whole variety of capacities to basically allow Russia to retool,” and his team had “told China directly if this continues, it will have an impact on the U.S.-China relationship.” He added, “We will not sit by and say everything is fine, for instance, if Russia’s offenses continue and they gain territory in Ukraine, that will alter the balance of power in Europe in ways that are, frankly, unacceptable from our perspective.”
Yellen warns China against Russia support
April 8
Speaking at the press conference in Beijing at the end of her China trip, Treasury Secretary Janet Yellen said that the U.S. is concerned about the “role that any firm, including those in the PRC, are playing in Russia’s military procurement.”
Yellen stressed that companies, “including those in the PRC, must not provide material support for Russia’s war and that they will face significant consequences if they do.” She added that banks that “facilitate significant transactions that channel military or dual-use goods to Russia’s defense industrial base expose themselves to the risk of U.S. sanctions.”
Senior US officials say China helping Russia’s war production
April 12
Senior Biden administration officials told reporters that the PRC helped Russia with its military production, including providing optics, microelectronics, drone engines, and other dual-use material, during a crucial stage in the Ukraine conflict, according to various news reports.
The officials said that China provided Russia with over 70 percent of its nearly $900 million in machine-tools imports in the last quarter of 2023. The officials add that Moscow has likely used the tools to construct ballistic missiles. Also, 90 percent of Russia’s microelectronics imports, which are used in the production of missiles, tanks, and aircraft, for all of 2023 came from China.
One senior official said that China “is actually taking a systematic effort to support Russia’s war effort.” One official said that PRC materials are filling critical gaps in Russia’s defense production cycle and are helping the latter carry out its “most ambitious defense expansion since the Soviet era and on a faster timeline than we believed possible early on in this conflict.”
One official said, “Our view is that one of the most game-changing moves available to us at this time to support Ukraine is to persuade the PRC to stop helping Russia reconstitute its military industrial base. Russia would struggle to sustain its war effort without PRC input.”
The officials said that President Joe Biden raised the issue in his recent phone with Xi Jinping, and that the issue is being discussed with U.S. allies in Europe and around the world.
US strengthens ties with Asian allies
April 10
President Biden and Japanese prime minister Fumio Kishida announced a “new era of U.S.-Japan strategic cooperation” during a bilateral meeting in Washington D.C.
As part of expanding defense and security cooperation, both sides agreed to:
- Bilaterally upgrade their respective command and control frameworks to “enable seamless integration of operations and capabilities and allow for greater interoperability and planning between U.S. and Japanese forces in peacetime and during contingencies.”
- AUKUS countries will consider cooperation with Japan on AUKUS Pillar II advanced capability projects.
- Enhance regional security, including cooperating on networked air defense architecture, missile defense information sharing, and deterrence operations to “address escalatory or provocative activities around Japan.”
- Deepen bilateral defense industry cooperation, including the co-production of missiles and maintenance of U.S. warships and aircraft.
April 11
Biden, Kishida, and Philippine president Ferdinand Marcos Jr. held a first-ever trilateral summit of the countries in Washington D.C.
In a joint vision statement, the three leaders expressed serious concerns about the PRC’s “dangerous and aggressive behavior” in the South China Sea. The leaders also opposed the “dangerous and coercive use of Coast Guard and maritime militia vessels in the South China Sea, as well as efforts to disrupt other countries’ offshore resource exploitation,” including the PRC’s obstruction of Philippine vessels. Further, the three leaders expressed serious concerns about the situation in the East China Sea and affirmed the importance of peace and stability across the Taiwan Strait.
Among the new initiatives include the U.S. inviting Japan and Philippine coast guard members onto a U.S. coast guard vessel during a patrol in the Indo-Pacific later in 2024. The coast guards of the three nations also plan to conduct an at-sea trilateral exercise and other maritime activities in the Indo-Pacific to “improve interoperability and advance maritime security and safety.
Lavrov goes to Beijing
April 9
1. In a meeting with Xi Jinping in Beijing, Russian foreign minister Sergei Lavrov said, “There is no place for dictatorship, hegemony, neocolonial and colonial practices, which are now being applied by the United States and all the rest of the collective West unquestioningly submitting to the will of Washington.”
2. PRC foreign minister Wang Yi held talks with Lavrov in Beijing.
According to state mouthpiece Xinhua, Wang said that the PRC supports “Russia’s development and revitalization under the leadership of President Putin” and supports the Russian people’s “independent choice of development path.”
Wang added that “China-Russia relations have been of irreplaceable value to maintaining global strategic stability” and that the PRC is willing to work with Russia to “strengthen the synergy of the two countries’ development plans and promote practical cooperation in various fields.”
With regard to Ukraine, Wang said that the PRC supports the “timely convention of an international conference recognized by both Russia and Ukraine, with equal participation of all parties, to fairly discuss all peace proposals.”
Wang also stressed that both the PRC and Russia believe that the “current global transformation is accelerating” and the momentum of the “global south” is “growing significantly. Therefore, Wang believes that it is necessary to “uphold equality among countries big and small, oppose hegemonism and power politics, oppose the monopoly of international affairs by a few countries, and effectively promote the democratization of international relations.”
Our take
1. Kurt Campbell’s April 9 remarks about U.S. strategic interest and the recent statements of other Biden administration senior officials make crystal clear to the CCP and the Xi leadership that Washington will not tolerate PRC support of Russia’s war effort in Ukraine.
The Biden administration’s drawing of “red lines” sets the stage for Sino-U.S. tensions escalating in the near future. While China and Russia have long been geopolitical rivals, the PRC presently has a vested interest in supporting the Russian Federation to keep the West tied down in Europe and less able to focus on dealing with the CCP threat. This means that Beijing will not renounce its “no limits” partnership with Russia (even if it publicly downplays it) and will find ways to back Moscow for as long as it can get away with doing so. Meanwhile, the U.S. has stated that it will not “sit by and say everything is fine” to the PRC if “Russia’s offenses continue and they gain territory in Ukraine” — a scenario that is unfolding as Ukraine’s front lines are at great risk of collapse.
2. The Biden administration is strengthening its relations and military cooperation with America’s allies in the Indo-Pacific region as a reaction to dangerous PRC maneuvers, to deter Beijing from invading Taiwan, and possibly to ramp up pressure against China when needed should the CCP regime refuse to cease supporting Russia.
We believe that the CCP will still continue its “gray zone” tactics in the South China Sea, East China Sea, and the Taiwan Strait despite growing efforts to counter them by the U.S. and its allies. This means that Sino-U.S. tensions are at increasing risk of flaring up like after the PRC spy balloon incident in the event of “near-misses” or “accidents” (擦槍走火) between PRC and allied vessels and aircraft. A serious incident, however, could force the Xi leadership to call a temporary moratorium on “gray zone” activities and tighten his control over the military.
It also cannot be ruled out that the CCP could engineer “accidents” involving civilian Chinese vessels and the military or paramilitary vessels belonging to the U.S. and its allies. Such “accidents” would be an attempt by the CCP to play the “victim” card internationally and tap into nationalist sentiments at home as the regime looks to flip the narrative of the PRC as the “aggressor” and attract sympathy instead.
