1 PRC authorities issue policies to promote auto and property trade-ins
PRC relaxes loan restrictions to promote auto trade-ins
April 3
The People’s Bank of China and the National Financial Regulatory Administration announced revisions to car loans to promote auto trade-ins (關於調整汽車貸款有關政策的通知).
Key details of the revisions include:
- Financial institutions can independently determine the lowest down payments they will accept on personal auto loans for gasoline-powered cars and new energy vehicles based on borrowers’ creditability and repayment capabilities.
- The loan ratio for conventional commercial gasoline vehicles remained unchanged at 70 percent, NEVs was at 75 percent, and second-hand cars were at 70 percent.
- Before the revisions, conventional cars were subjected to a minimum down payment of 20 percent and NEVs to 15 percent.
- Financial institutions are encouraged to appropriately waive prepayment penalties incurred during auto trade-ins (or “exchanging old for new” in Chinese; 以舊換新).
- Financial institutions are required to strengthen their management of the entire auto loan process, ensure the safety of loan assets, and strictly prevent the misuse of loan funds for other uses.
Mainland media reported that there were 336 million cars (77 percent of the total) among the 440 million vehicles in China as of the end of December 2023. Also, deputy commerce minister Sheng Qiuping noted that the Chinese auto market is undergoing “accelerated transformation and restructuring” and the potential for auto trade-ins is “enormous.”
Some cities promote property trade-ins
April 4
The state-run China Securities Journal reported that the local governments in more than 10 cities and regions are implementing policies pertaining to the trade-in of property. The cities and regions are Zhengzhou City, Liangxi District of Wuxi City, Zibo City, Nantong City, Nanjing City, Qingdao City, Jinan City, Ningbo City, Lianyungang City, Bozhou City, and Fuyang City.
Reports from other mainland media provide details on some of the policies being introduced:
Zhengzhou
- The Zhengzhou authorities plan to complete the trade-in of 10,000 units of second-hand houses for new ones.
- The property trade-ins would be carried out either through market-based transactions or through Zhengzhou Urban Development Group (a local government financing vehicle) purchasing second-hand homes and facilitating trade-ins.
- Industry insiders estimate that the Zhengzhou authorities can stimulate the sale of 1 million square meters of new houses by helping residents sell 10,000 units of older homes (an average of 100 square meters per household). The planned 1 million square meters in new house sales is equivalent to 17 percent of such transactions in the main urban area of Zhengzhou in 2023.
Liangxi District
- The LGFV Liangxi Urban Development Group will repurchase second-hand property and support residents in purchasing new property belonging to the group.
- The price of the second-hand property repurchased by Liangxi Urban Development Group cannot exceed 60 percent of the price of new homes that fall under the purview of the LGFV and were sold to replace the second-hand property.
- Liangxi Urban Development Group set an initial quota of 200 units of property trade-ins under the aforementioned scheme.
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Previously, real estate developers or government agencies ran property trade-in initiatives to stimulate housing sales by encouraging residents to sell their old property and buy new homes through various repurchasing, swapping, or subsidy schemes. To that end, many local governments in places such as Nanjing, Zibo, Nantong, Yangzhou, Haining, and Jining pushed property trade-ins, with some places even providing residents with official subsidies to make a trade-in.
Under earlier arrangements, there were few instances where local governments or state-owned enterprises (including LGFVs) directly purchased property from residents. Instead, schemes such as “joint selling assistance” (聯合幫賣) and “developer takeover” (房企接手) were more commonly used.
Under the “joint selling assistance” scheme, home buyers, developers, and real estate agents sign a three-party agreement where the buyer pays a deposit to reserve the purchase of a new home and real estate agents prioritize selling the buyer’s old property. If the old property is sold within a specified period (typically between three to six months), then the agreement is fulfilled and the property trade-in is successful. Otherwise, the developer steps in to pay the refund on the buyer’s new home deposit and the trade-in does not go through.
Under the “developer takeover” scheme, the developer or a third-party arranged by the developer takes over the home buyer’s old property. The developer then mortgages the old property to the bank and obtains a loan for the buyer to offset the payment for a new home.
More concerns about China’s excess industrial capacity
Countries and observers are increasingly taking note of and expressing concern at the PRC’s exporting of excess industrial capacity. Recent examples include:
- On March 18, The Washington Post published an article noting that Chinese factories produce 40 million cars per year, or 15 million more than required to meet local demand. The Post also cited San Diego-based industry consultant Michael Dunne as saying that the 5 million cars China exported in 2023 was roughly five times more than its total in 2020, and the number could double in the years ahead. The Post further noted that Elon Musk said earlier in 2024 that Chinese companies would “pretty much demolish most other car companies in the world” unless they face new trade barriers.
- On March 27, U.S. Treasury Secretary Janet Yellen said in a speech in Georgia that PRC government support in sectors like steel and aluminum in the past led to “substantial overinvestment and excess capacity that Chinese firms looked to export abroad at depressed prices.” Now “we see excess capacity building in ‘new’ industries like solar, EVs, and lithium-ion batteries.” Yellen added that “China’s overcapacity distorts global prices and production patterns and hurts American firms and workers, as well as firms and workers around the world.”
- On March 27, the European Federation for Transport and Environment (T&E) published a paper noting that about 19.5 percent of EVs (300,000 units) sold in the EU in 2023 were from China, with nearly a third of the sales in France and Spain coming from China. T&E expects the share of made-in-China vehicles in the EU to rise to just over 25 percent in 2024 as brands such as BYD increase their global expansion.
- On April 5, Secretary Yellen said at an American Chamber of Commerce event in Guangzhou that PRC “direct and indirect government support” is “currently leading to production capacity that significantly exceeds China’s domestic demand, as well as what the global market can bear.” She added, “As I’ve said before, China is too large to export its way to rapid growth. And if policies are oriented only at generating supply and not also at generating demand, global spillovers will result.”
Our take
1. The PRC central authorities’ revisions to car loans and local governments’ support for property trade-ins are in line with the State Council’s earlier action plan on the matter. We previously analyzed that the action plan appears to be part of Beijing’s effort to find growth points to compensate for the property industry’s contribution to the economy.
At a glance, the aforementioned policies appear likely to benefit the Chinese economy to a degree. However, the long-term feasibility and effectiveness of those policies remain to be seen:
i) The main idea behind the CCP authorities’ promotion of vehicle and property trade-ins is getting the large amounts of funds idling in the banks to circulate and stimulate the economy. However, a temporary spurt in car and home sales is unlikely to move the needle much in reducing idle funds; China’s M2 money supply was almost at 300 trillion yuan in February 2024.
ii) Local governments and SOEs stepping in to repurchase second-hand homes from residents to facilitate their buying of new homes could stimulate housing demand to a degree. However, local governments and SOEs still have to solve the funding issue to make the repurchases for the plan to work, and local authorities in general are strapped for funds as we have indicated in several earlier newsletters. More recently, a March 31 report by the state-funded mainland media National Business Daily noted that places like Zhongmou County in Zhengzhou City and Shucheng County in Lu’an City originally promised to provide “housing subsidies” when attracting talents, but were unable to issue those subsidies due to fiscal shortages.
Local authorities and SOEs will also likely find it hard to sustain the repurchasing plan as more second-hand homes and foreclosed property flood the market, and as the prices of second-hand homes trend downward.
iii) The central authorities’ revisions to car loans could lead to an uptick in vehicle sales and address the issue with the exporting of overcapacity to a degree. However, it is unclear whether the move will be enough to noticeably improve car demand as the consumption capacity of the Chinese population decreases:
- Personal income tax from fiscal revenue in the first two months of 2024 decreased by 15.9 percent year-on-year to 326.2 billion yuan. This reflects a decrease in the income for those earning more than 5,000 yuan per month, who are more likely to have disposable income to buy or trade-in cars.
- China Securities Times published a report on April 1 where it went over the annual reports of 22 publicly listed securities firms and found that 60 percent of the employees at those companies saw their average salaries decline in 2023. China Securities Times further noted that the drop in average salaries only slightly narrowed from the drastic 20 percent to 40 percent decline in 2022.
- Mainland media went over the annual reports of 10 publicly listed banks and found that employees at those banks had to return a total of 99.88 million yuan in performance-based bonuses in 2023.
2. Feasibility and effectiveness aside, the CCP authorities risk creating new channels in promoting auto and property trade-ins for financial intermediaries to make fraudulent loans and generate new financial risks.
We previously looked at how financial intermediaries fraudulently converted mortgages into business loans to allow their clients to pay off home loans and market intermediaries running “pseudo financial asset exchanges” to fulfill a demand in non-standard financing. Mainland media The Time Weekly also reported on Feb. 2, 2024 that intermediaries, developers, bank insiders, and “professional debtors” in second and third-tier cities have been found to have colluded to obtain bank loans through fraudulent means. For instance, intermediaries helped to disguise “professional debtors” as legitimate home buyers to take out loans from banks on the pretext of purchasing properties. These “professional debtors” would then receive a certain percentage of the loan money and later claim that they are not able to make repayments, and the banks would find themselves saddled with non-performing loans.
Given the propensity for fraud that Party culture fosters, the CCP authorities’ new policies aimed at encouraging auto and property trade-ins could end up creating new and larger financial risks for themselves instead of resolving the issues they were originally intended to solve.
2 US and allies prepare to tighten screws on the PRC as Ukraine situation grows grim
Ukraine front lines in danger of collapsing
April 3
POLITICO Europe published an article citing high-ranking Ukrainian military officers who served under General Valery Zaluzhny as saying that there is a great risk of the front lines collapsing wherever Russian generals decide to focus their offensive. The Ukrainian military officers say that Russia will likely be able to “penetrate the front line and to crash it in some parts” due to the “much greater weight in numbers and the guided aerial bombs that have been smashing Ukrainian positions for weeks now.”
One of the top-ranking military sources said, “There’s nothing that can help Ukraine now because there are no serious technologies able to compensate Ukraine for the large mass of troops Russia is likely to hurl at us. We don’t have those technologies, and the West doesn’t have them as well in sufficient numbers.”
US warns of deepening PRC support for Russia
April 5
The Financial Times reported that U.S. Secretary of State Antony Blinken warned EU and NATO foreign ministers during meetings in the week of April 1 that Beijing was assisting Moscow “at a concerning scale” and providing “tools, inputs, and technical expertise,” citing three people familiar with the discussions.
The people quoted Blinken as saying that the PRC’s assistance was particularly focused on Russia’s production of optical equipment and propellants and its space sector, which “not only contributes to Russia’s aggression in Ukraine but threatens other countries.”
One of the people said that Blinken raised concerns about the PRC in every session of a meeting of NATO foreign ministers on April 3 and April 4. “The warnings were explicit. There has been a shift and it was felt in the room … this was a new development. It was very striking,” the person said.
April 6
1. Bloomberg reported that the U.S. is warning allies the PRC has increased its support for Russia, citing people familiar with the matter. This includes providing geospatial intelligence for military purposes, microelectronics and machine tools for tanks, optics, propellants to be used in missiles, and greater space cooperation.
White House National Security Council spokesperson Adrienne Watson said that President Joe Biden brought up concerns in speaking with Xi Jinping during their call about the PRC’s support for Russia’s defense industrial base, including machine tools, optics, nitrocellulose, microelectronics, and turbojet engines.
2. In her meeting with PRC vice premier He Lifeng in Guangzhou, U.S. Treasury Secretary Janet Yellen said that companies, including those in the PRC, “must not provide material support for Russia’s war against Ukraine, including support to the Russian defense industrial base,” and warned of “significant consequences if they do so.”
AUKUS linked to Taiwan, could add new members
April 3
U.S. Deputy Secretary of State Kurt Campbell suggested at a think tank event in Washington D.C. that the AUKUS submarine project between Australia, the United Kingdom, and the United States could help deter a PRC move against Taiwan.
Campbell said at the Center for a New American Security that AUKUS submarine capabilities have “enormous implications in a variety of scenarios, including in cross-strait circumstances.” He added, “I would argue that working closely with other nations, not just diplomatically but in defense avenues, has the consequence of strengthening peace and stability more generally.”
Campbell also said that the U.S., Japan, and the Philippines will have an “unprecedented trilateral engagement between the three nations” in the week of April 8. “You will see commitments on all three nations that involve closer coordination and engagement in the South China Sea and elsewhere,” he said.
2. U.S. Ambassador to Japan Rahm Emanuel wrote in an op-ed to The Wall Street Journal that Japan is “about to become the first additional Pillar II partner” of the AUKUS defense pact.
April 6
The Financial Times reported that the U.S., the UK, and Australia will launch talks on April 8 on adding new members into AUKUS related to Pillar II of the alliance, citing people familiar with the matter. Pillar II involves collaboration on technologies such as hypersonic weapons and undersea capabilities.
The AUKUS countries are not planning on expanding Pillar I, which involves Australia’s procurement of nuclear-powered submarines.
Leaders of the US, Japan, the Philippines to meet in DC
U.S. President Joe Biden, Japanese prime minister Fumio Kishida will meet in Washington D.C. on April 10 and are expected to announce a “historic” move to restructure the U.S. military command in Japan to strengthen operational planning and exercises between the two countries. According to The Financial Times, the allies want to “bolster their security ties to respond to what they view as a growing threat from China, which requires their militaries to co-operate and plan more seamlessly, particularly in a crisis such as a Taiwan conflict.”
The Financial Times said that one model the Biden administration is weighing involves the creation of a new U.S. military joint task force that would be attached to the U.S. Pacific Fleet. The fleet’s four-star commander would also “spend more time in Japan than at present and would have an enhanced support structure” in the country. The task force would include different parts of the U.S. military and would shift to Japan over time. People familiar with the matter said that other models are being considered, including upgrading the United States Forces Japan, and the Pentagon is some way from making any decision.
Meanwhile, Biden, Kishida, and Philippine president Ferdinand Marcos Jr. will hold a trilateral meeting in Washington D.C. on April 11.
Washington pushes Dutch on ASML service contracts
April 4
Reuters reported that the Biden administration is planning to press the Netherlands to stop leading Dutch chipmaking equipment maker ASML from servicing some tools in China, citing people familiar with the matter.
Washington could also be seeking to add to a list of Chinese semiconductor factories restricted from receiving Dutch equipment as part of U.S. export policy chief Alan Estevez’s discussions with officials from the Dutch government and ASML Holding NV on April 8, one of the people said.
Backdrop
1. President Biden and PRC leader Xi Jinping had a phone call on April 2. According to the White House, Biden raised concerns with Xi over “the PRC’s support for Russia’s defense industrial base and its impact on European and transatlantic security” as well as the PRC’s “unfair trade policies and non-market economic practices.”
Meanwhile, Xi warned Biden that “the Taiwan question is the first red line that must not be crossed in China-U.S. relations” and “China is not going to sit back and watch” if the U.S. is “adamant on containing China’s hi-tech development and depriving China of its legitimate right to development.”
2. The U.S., Europe, and other countries have also been calling attention to the PRC’s exporting of excess industrial capacity (see first entry in this newsletter).
Our take
The Biden administration and U.S. allies are stepping up to rein in China on a series of issues. This includes deterring the PRC against acts of aggression against Taiwan and in the South China Sea, disincentivizing Beijing from aiding Moscow’s war effort in Ukraine, cautioning the CCP regime against exporting its excess capacity and impacting the global economy with another “China shock,” and further restricting the PRC’s access to advance technologies.
The U.S. and its allies appear to be strengthening measures against the PRC as a response to the Xi leadership’s growing authoritarianism and overt geopolitical ambitions, as well as increasing awareness and knowledge of the PRC’s threat to the security of respective nations. Washington could also be looking to tighten the screws on Beijing to get the latter to stop or tone down support for Russia as the Ukrainians risk collapse of their front lines in the face of the Kremlin’s recent advances. We noted in earlier newsletters that the U.S. is likely to ramp up pressure against the PRC as it prioritizes national security concerns and attempts to dissuade Beijing from aiding Russia in its invasion of Ukraine.
The Xi leadership will likely protest the latest efforts by the U.S. and its allies to curb the PRC in its usual fashion. However, we believe that Beijing is likely to become less, not more (as mainstream observers suspect), prone to aggression as the “new cold war” heats up after a very brief détente. This is because the Xi leadership is desperately trying to steer the regime out of serious domestic crises and can ill-afford to bring another calamitous crisis upon itself by moving against Taiwan given that the People’s Liberation Army is not currently ready to attempt such a challenging operation; the Chinese economy is ill-equipped to support an invasion or weather global sanctions that would follow; and the Chinese people’s growing discontent with the CCP regime.
The Chinese economy will likely take a toll from growing efforts by the U.S. and its allies to counter the CCP threat. Foreign businesses, investors, and governments, who are already concerned by the lack of strong stimulus from Beijing and economic reform, will likely become even more hesitant to invest in China and will instead be encouraged to pull capital out. While there will be countries and foreign investors who could double down on China, the international community at large will become more guarded in dealing with the PRC as geopolitical tensions and risks escalate following increased pressure from the U.S. and its allies.
What’s next
The U.S. and its allies could coordinate various measures to force the PRC to fall in line with the rules-based international order and abandon Russia. Measures could include strengthening military cooperation and exercises, sanctioning the PRC over supporting the Russian war effort, as well as expanding the U.S. trade (adding tariffs), technology (further restricting China’s access to advanced technologies), and financial wars against the PRC.
Sharply increasing geopolitical pressure against the PRC could lead to increased political pressure for Xi Jinping, and a corresponding increase in Xi and the CCP’s levels of political risk.
