SinoInsight 1
Between January to the end of October 2019, 148 bonds issued by private enterprises had defaulted (total value of 116.344 billion yuan), according to data from Chinese securities brokerage company Industrial Securities Co. In comparison, there were 137 private enterprise bond defaults (total value of 125.509 billion yuan) in the whole of 2018.
According to research data from a debenture review and outlook report published by Dongfang Golden Credit Rating International Co., Ltd, private enterprises in China issued a total of 314.7 billion yuan worth of debentures in the first three quarters of 2019, a decrease of 21 percent year-on-year. Also, the amount of debt in circulation shrank to 4.7 percent from 7.8 percent in 2018.
On Nov. 12, Yu Xuejun, chairman of the supervisory board for key state-owned financial institutions at the China Banking and Insurance Regulatory Commission, said at a forum on forecasting and strategy in 2020 the 17th Caijing Annual Conference in Beijing that there is a “clear differentiation” in the issue of bonds on the bond market. State-owned enterprises and government-linked enterprises bonds are paying out lower interest rates while private enterprises with not bad ratings are finding it difficult to issue bonds. Meanwhile, risks for “a small number” of small- and medium-sized financial institutions are rising, which impacts their ability to support real growth for companies.
OUR TAKE
1. The above data indicates that the situation with private enterprises defaulting on bonds has become very serious. With the exception of a few government-backed enterprises or leading companies, all other small- and medium-sized enterprises are finding it difficult to raise funds, particularly with high financing costs. This means that the People’s Bank of China’s inclusive financing measures for SMEs that were rolled out at the start of this year have only a limited effect in helping SMEs.
2. As China’s economy continues to rapidly worsen and with the outlook on successful Sino-U.S. trade negotiations looking bleak, there would inevitably be more private sector bond defaults and bankruptcies. This would lead to an increase in non-performing loans in the Chinese financial system, and greatly raise the odds of small- and medium-sized financial institutions seeing bank runs or going into administration.
China’s current financial trends affirm an earlier assessment Peng Chun, the chairman and CEO of China’s sovereign wealth fund China Investment Corporation. In September, Peng warned that bank bankruptcies could become a “fact of life” and “financial failures” on the mainland could become the norm.
3. Given current domestic and geopolitical headwinds, we believe that China and the United States will find it very difficult to continue with trade negotiations even if a “phase one” trade deal is reached. Sino-U.S. relations could take a turn for the worst at any moment, and the breakdown in the relationship could trigger systemic financial risks in China.
SinoInsight 2
In the afternoon of Nov. 16 (Hong Kong time), People’s Liberation Army soldiers garrisoned at the Kowloon East Barracks in Hong Kong emerged from their quarters to clear up bricks and other debris left by protesters on a street near their barracks. The soldiers, who numbered about 20, were dressed in shirts, singlets, shorts, and running shoes. The back of the soldiers’ singlets either bore the characters “te dian ba lian” (特點八連) or “xue feng te zhan ying” (雪枫特战营); according to Chinese language media reports, the characters were a reference to special forces troops stationed in Xinjiang who specialize in counter-terrorism work. In an interview with a reporter, one of the soldiers said that their clean-up work was “spontaneous” and added that “stopping violence and ending chaos is our responsibility.”
In a tweet, Global Times editor-in-chief Hu Xijin wrote that the PLA soldiers “did this only for cleaning the road linking the garrison and showing friendship to local people. They don’t want to send any political signal.”
In the evening, a Hong Kong government spokesperson said that PLA garrison’s clean-up work was “purely a voluntary community activity” and that the Hong Kong government did not request help from them.
Hong Kong pan-democrat lawmakers issued a joint statement that strongly condemned the actions of the PLA troops and noted that they were in violation of Article 14 of the Hong Kong Basic Law and the Garrison Law.
According to the Garrison Law, PLA troops stationed in Hong Kong cannot interfere in local affairs. The Hong Kong government can request aid from garrisoned PLA troops to help maintain law and order and carry out disaster relief when necessary. Neither the Garrison Law nor the Basic Law states that PLA troops can act spontaneously.
On the night of Nov. 17 to early morning on Nov. 18 (Hong Kong time), Hong Kong police and protesters clashed at the Hong Kong Polytechnic University campus. Riot police fired tear gas canisters and water cannons, while the protesters hurled Molotov cocktails, gasoline bombs, and bricks at the police. According to Hong Kong media reports, the police “raptor squad” paramilitary task force were spotted carrying AR-15 rifles near the universe campus. The frontline police also threatened to fire live bullets at the protesters. A photograph widely circulated on social media showed journalists and volunteer first-aiders seated on the floor in police custody with hands cable-tied behind their backs.
At a press conference, Hong Kong police superintendent Louis Lau warned “cold-blooded rioters” to cease attacking the police or “we will have no other choice but to use the minimal force necessary to address the situation, including real bullets.”
On Nov. 17, Rep. Jim McGovern, Chair of the Congressional-Executive Commission on China, tweeted: “The Chinese and Hong Kong governments must immediately deescalate the situation and exercise restraint at PolyU. More violence & bloodshed will only make things worse. The world is watching.”
OUR TAKE
1. The purpose of the PLA troops’ jaunt in the streets of Hong Kong seems to be three-fold: Intimidate the Hong Kong protesters, spin positive domestic propaganda, and respond in a not-too-subtle manner to the U.S.-China Economic and Security Review Commission’s 2019 Annual Report published on Nov. 14. The USCC report recommended that the U.S. Congress suspend Hong Kong’s autonomous status if China “deploys People’s Liberation Army or People’s Armed Police forces to engage in armed intervention in Hong Kong.”
We believe that the deployment of PLA garrison troops is not a very bright move by the CCP. While the move might help it score some domestic propaganda points, it would also end up strengthening the Hong Kong people’s determination to resist the CCP and deepen their resolve to secure genuine universal suffrage. Further, the sight of PLA troops in the streets of Hong Kong would only serve as evidence to the world that the CCP does not plan to abide by the Sino-British Joint Declaration and the Basic Law. The U.S. in particular would be even more wary of the CCP and its commitment to “one country, two systems,” and could pay even closer attention to PLA troop movement going forward.
2. The actions of the PLA troops on Nov. 16 and the police action at the Hong Kong Polytechnic University campus on Nov. 17 and Nov. 18 indirectly affirm the concerns we raised in our Nov. 13 emergency warning about an imminent crackdown in Hong Kong.
Various governments and the international community have since paid greater attention to the increasingly tense situation in Hong Kong after Nov. 13 (the U.S. Senate sought to fast track the passing of the 2019 Hong Kong Democracy and Human Rights Act). However, with the young protesters growing more and more desperate and the Hong Kong police more prepared to use lethal force, there remains a very real possibility of a Tiananmen or near-Tiananmen-style tragedy occurring in Hong Kong.
