SinoInsight 1
The PTU was previously attacked by official mainland media and pro-CCP Hong Kong media for being sympathetic to the city’s pro-democracy movement. On July 31, Xinhua and People’s Daily ran op-eds where they described the PTU as a “cancer” which has long engaged in “anti-China activities to disrupt Hong Kong.” The Hong Kong Education Bureau subsequently announced the ending of its working relationship with the PTU.
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On Aug. 11, a Facebook page named “The Hong Kong Association of Falun Dafa” (香港法輪大法學會) issued a statement claiming that Falun Gong practitioners in Hong Kong “decided to leave Hong Kong and initiated the relevant procedures.” The following day, many Hong Kong and Taiwanese media outlets reported on the news, including pro-CCP outlets like Hong Kong’s TVB and Ta Kung Pao. Several pro-establishment lawmakers also shared the reports, including Elizabeth Quat, who was among the handful of pro-establishment lawmakers who pressed the Hong Kong government to clamp down on Falun Gong during a Legislative Council session in July. Observers of Hong Kong’s eroding freedoms raised concern over the news.
On Aug. 12, the official Falun Gong association in Hong Kong issued a statement clarifying that it has no social media account, that the Facebook page in question was a fake account, and the post was bogus. The association added that Falun Gong has no plans to leave Hong Kong. Earlier this year on Feb. 13, the association said in a statement on its website that there are fake social media accounts claiming to represent “Falun Gong” or the actual Hong Kong Association of Falun Dafa, and said that those fake accounts do not represent Falun Gong.
Later, Newsweek published a fact check refuting the fake Facebook page and highlighting key points of the official Hong Kong Falun Gong association’s statement. Party propaganda outlet Global Times reported that Falun Gong was exiting Hong Kong in a piece about “opposition groups” in Hong Kong disbanding, but added that “the group denied it. Many Hong Kong and Taiwanese media that initially reported on Falun Gong exiting Hong Kong either withdrew their original pieces or edited them by including the official Falun Gong association’s statement. Elizabeth Quat and other Hong Kong pro-establishment lawmakers also deleted the fake social media post. Ta Kung Pao, however, retained its since-debunked news piece.
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On Aug. 15, the Civil Human Rights Front (CHRF) announced that it was disbanding amid severe and unprecedented challenges. The CHRF is a prominent Hong Kong NGO focusing on politics and social issues, and is associated with the city’s pan-democratic camp. The organization is known for organizing July 1 marches in Hong Kong, which became a large-scale annual event from 2003 after 500,000 Hongkongers participated in that year’s march to protest the Hong Kong government’s effort to pass national security legislation (Article 23 of the Basic Law).
Also on Aug. 15, the PRC Hong Kong and Macao Affairs Office (HKMAO) and Hong Kong Liaison Office issued statements slamming the CHRF for “messing up Hong Kong” and “collaborating with foreign forces,” and called for the group to be “severely punished.” A HKMAO spokesperson also described the CHRF’s disbandment as “a cicada shedding its skin,” adding that the latter’s disbanding statement was “outrageous, wild, and arrogant.”
Days before CHRF announced its disbandment, Hong Kong police commissioner Raymond Siu Chak-yee said in an exclusive interview with Ta Kung Pao published on Aug. 13 that the group had not registered as a company or as a legal society with the police in accordance with the law. In operating without proper registration, the CHRF can be suspected of being in violation of the Hong Kong National Security Law for organizing large-scale illegal demonstrations and gatherings in recent years, Siu said. He added that the police has already collected evidence and can take action against illegal organizations “at any time,” and will not rule investigating and seeking prosecutions against “backbone” CHRF figures.
The CHRF applied to become an association in 2006, but canceled its registration after several months. In March 2021, Hong Kong media outlets reported that the organization was being investigated or could be banned, leading to the withdrawal of many of its associates. In April, CHRF convenor Figo Chan Ho-wun was arrested as part of a crackdown on pro-democracy activists and was subsequently sentenced to 18 months in prison. The Hong Kong police also began investigating the group in April.
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According to the mid-year data released by the Hong Kong government’s Census and Statistics Department, the city population as of mid-2021 decreased by 1.2 percent (87,100) from the same period last year to 7.3947 million. Also during the same period, a net total of 89,200 Hong Kong residents emigrated from the territory.
OUR TAKE
1. The CCP and Hong Kong government’s crackdown on the city’s pro-democracy movement and steady erosion of rights and freedoms are clearly taking a toll on the city. Hong Kong will lose its character and vitality over time as the territory’s youth and pro-democracy supporters leave the territory to escape the national security dragnet.
Hong Kong’s population may eventually stabilize should the CCP ramp up its long-term effort to “import” mainlanders into the city. However, this process will only accelerate the “reddening” of Hong Kong (赤化香港) and transformation of the territory into just another mainland city with all the same flaws. Businesses, investors, and governments must account for heightened political risks in Hong Kong.
2. We previously examined the Falun Gong situation in Hong Kong and how it concerns the Xi Jinping-Jiang Zemin factional struggle in the CCP elite (see here, here, here, and here). The recent “fake news” incident about Falun Gong withdrawing from Hong Kong affirms our earlier analysis.
Two likely scenarios could have given rise to the “fake news” incident, and both scenarios overlap.
The first scenario sees the incident emerging as the natural product of the CCP’s anti-Falun Gong mechanism. With Hong Kong pro-democracy groups announcing their disbandment one after the other, the Party’s cyber “army” could have seized the opportunity to put out more disinformation in the hopes of sowing even more confusion and panic. News that Falun Gong is quitting Hong Kong would also be very demoralizing to Hongkongers and human rights activists in the international community given the perseverance of the spiritual discipline’s practitioners in the face of adversity (Article 23, constant harassment, etc.) for over two decades. To Hongkongers, Falun Gong practitioners—with their yellow T-shirts, information booths, associated media outlets, and “Heaven Will Destroy the CCP” (天滅中共) banners—represent a fixed point of resistance to the Party, and the “crumbling” of said fixed point would signal the end of all hope for Hong Kong under the new national security regime. The CCP thus sees great value in spreading Falun Gong-related disinformation given the group’s significance in the broader psychological battle.
In the second scenario, the Jiang faction had a hand in creating and spreading disinformation about Falun Gong leaving Hong Kong to force Xi Jinping to clarify his stance on the Falun Gong issue in general, as well as make him look even worse for imposing the national security regime in the territory. Given that the incident happened around the period of the Beidaihe meetings, it is also possible that it is part of broader efforts by the Jiang faction and the “anti-Xi coalition” to heap pressure on Xi and secure leverage to check the latter’s political ambitions (third term, key personnel arrangements at the 20th Party Congress, etc.).
The Jiang faction, however, could have overplayed its hand by prominently calling attention to the Falun Gong issue. For one, the CCP has indirectly acknowledged through the recent Falun Gong disinformation incident that it has failed to squash the spiritual discipline despite pretending to by mentioning Falun Gong in its propaganda from 2003 only when absolutely necessary. Observers will be reminded of the fact that the protracted CCP-Falun Gong “war of attrition” is still ongoing (regime propaganda often portrays Falun Gong as an overseas-based “anti-China” force that has been all but banished from the mainland), particularly in Hong Kong where the national security regime is sweeping up “subversive” groups one after the other. The international community will also pay greater attention to the plight of Falun Gong in Hong Kong and the spiritual discipline going forward—precisely what the Jiang faction and the CCP have long labored to prevent.
Further, the Jiang faction would have used the fake news incident to “remind” Xi Jinping that he can only delay clarifying his position on Falun Gong for only so long because the national security regime in Hong Kong and the CCP’s anti-Falun Gong policy mean that a crackdown on Falun Gong in the city is only a matter of time. And regardless of how Xi finally plays the Falun Gong “card” (crack down or “rehabilitate”), domestic and international reactions to his decision will trigger political Black Swans and bring the regime closer to its “Berlin Wall moment”—a scenario that also does not benefit the Jiang faction.
3. The Hong Kong Falun Gong “fake news” incident offers a good case study for countries looking to better understand CCP influence operations. How overseas Chinese media outlets, Hong Kong lawmakers, and other individuals or groups handled the incident offers a clue about the degree to which they are beholden to the CCP and possibly even which faction in the Party elite. For instance, Ta Kung Pao opted not to amend its piece on Falun Gong exiting Hong Kong even after the Hong Kong Falun Dafa association issued a statement debunking it, which indicates that the Hong Kong media outlet is very “red.”
How the Hong Kong government and the CCP handles Falun Gong in Hong Kong, including allowing media associated with Falun Gong practitioners to operate, offers insight into how much freedom remains in the territory. The development also sheds light on the state of the Xi-Jiang factional struggle and where the political winds are blowing in Beijing.
Xi Jinping has greater incentive to keep the Falun Gong “card” as leverage against his factional rivals as domestic and external pressures mount for the CCP regime. Xi can ill-afford to worsen his personal situation by “adopting” Jiang Zemin’s political legacy as his own and in doing so creating even more enemies for himself. As long as factional struggle tensions in the Party elite remain, the “unusual” situation in Hong Kong where pro-democracy groups continue to be targeted by the police and the national security apparatus while Falun Gong remains relatively unscathed will likely continue. A sudden swerve in how Falun Gong is treated in Hong Kong—for good or ill—would indicate that Xi has finally made up his mind to fundamentally resolve the factional struggle that has troubled him since even before he took office in 2012.
SinoInsight 2
Recently, Evergrande has been selling off assets to make debt payments. Meanwhile, rumors are circulating that several state-owned assets could potentially purchase some of the company’s assets.
Asset sales
On Aug. 10, China Evergrande announced the sale of some of its assets, including stakes in Evergrande New Energy Vehicle and Evergrande Property Services, to potential independent third-party investors. The news saw Evergrande’s shares rebound for three consecutive days (Aug. 9 to Aug. 11), with China Evergrande stocks rising 22 percent, Evergrande New Energy Vehicle up 18.5 percent, and Evergrande Property Services surging 45.4 percent.
According to publicly available information, the market value of Evergrande New Energy Vehicle and Evergrande Property Services is approximately HK$128 billion and HK$69.5 billion respectively. As of the end of 2020, Evergrande Group held 74.95 percent of Evergrande New Energy Vehicle’s shares and a 60.84 percent stake in Evergrande Property Services.
Per an announcement by Evergrande New Energy Vehicle, the company’s net cash flow in 2020 was negative 1.96 billion yuan, with losses of 7.7 billion yuan. Evergrande New Energy Vehicle expects losses of 4.8 billion yuan in the first half of 2021. The company has valuable land assets that would be attractive to potential investors, with about 4.2 billion yuan worth of land use rights at the end of 2020.
Evergrande Property Services has better financial fundamentals than Evergrande New Energy Vehicle and high-quality assets. The former company’s operating income for 2020 was 10.509 billion yuan (up 43.31 percent year-on-year), with gross profit of 4.006 billion yuan (up 128.26 percent YoY). Potential investors could be more interested in taking over China Evergrande’s majority stake than in becoming just a minor shareholder.
According to an Aug. 10 report by Hong Kong financial media “Giant ICON” (巨子ICON), Evergrande Group could sell its majority stake in Evergrande Property Services to Vanke. Vanke has been buying up assets of other debt-troubled real estate companies in recent years, including acquiring Tahoe Group for 2.4 billion yuan in August 2020 and becoming the company’s second largest shareholder. Vanke also has plans to acquire Sichuan Languang Development and other projects this year.
Meanwhile, mainland media reported that a group of state-owned assets in Guangdong Province is planning to purchase “relevant assets” from Evergrande to help it resolve its liquidity problem. Among the state-owned assets named are Vanke, Guangzhou Pearl River Industrial Development, Guangzhou Chengtou, Guangzhou Yuexiu Financial Holdings Group, urban investment companies under China Resources, and China Poly Group. The group contains “no private enterprises for the time being,” a source familiar with the matter told Yicai Global. However, other mainland media reporters who reached out to some of the aforementioned companies received replies to the effect of “we’ve never heard of [the group].” Yuexiu Financial Holdings Group also issued a statement on Aug. 11 stating that its current business does not involve Evergrande and nor has it participated in the latter’s asset restructuring.
Evergrande has been planning to sell real estate assets, but not the equity of listed companies, since early June, according to a recent Caixin report. Transactions, however, have not been finalized because Evergrande is unwilling to sell at a loss.
Evergrande’s other asset and equity activity this year include:
- On Jan. 24, Evergrande New Energy Vehicle issued 952 million units of new shares to six investors at the price of HK$27.30 per share with a lock-up period of 12 months, raising HK$26 billion.
- On Jan. 22 and Aug. 1, Evergrande sold a total of 19 percent of its stake in HengTen Networks Group, raising about HK$7.7 billion.
- On July 30, mainland media reported recent inquiries found that Evergrande sold its entire stake (about 7 percent) in Shenzhen High-tech Investment Group to a company under Vanke for an undisclosed amount. Evergrande originally bought the shares at 981 million yuan.
- On Aug. 3, market information agency REDD reported that PRC regulators described Evergrande’s financial difficulties as “a liquidity problem, not insolvency,” citing two people familiar with the matter. To resolve its liquidity issues, Evergrande plans to sell about 120 billion yuan ($18.6 billion) worth of assets (including some renovation projects in Shenzhen) and negotiate the sale of several projects to China Jinmao. Evergrande and Jinmao began negotiating in early June and are now in discussions about transaction details, according to mainland media reports.
- On Aug. 6, information from enterprise information platform Qichacha showed that Chongqing Trust increased its stake in Suzhou Shengjian Property from 49 percent to 99 percent, while Evergrande cut its stake in Suzhou Shengjian Property from 51 percent to 1 percent.
Evergrande had 2.3 trillion yuan in total assets at the end of 2020, the most among the four Chinese real estate companies with over 1 trillion yuan in assets (Country Garden: 2 trillion yuan; Vanke: 1.9 trillion yuan; Sunac: 1.1 trillion yuan).
Projects suspended
On Aug. 12, PRC state broadcaster China National Radio reported definitively that two of Evergrande Real Estate Group’s projects in Kunming had been suspended in August due to a shortage of funds and defaults on commercial papers.
China National Radio also noted that a joint project by an Evergrande subsidiary and Chongqing Construction Engineering Group was suspended due to Evergrande being behind on payments and defaulting on commercial papers. The Evergrande subsidiary owes a total of 210 million yuan on the joint project.
Debt claims
On July 28, Huaibei Mining Holdings announced that it was suing Evergrande and its subsidiaries for about 401 million yuan in construction costs and liquidated damages.
On July 29, C & T Technology Development announced that it was freezing the 76.0321 million units of its shares that are held by Evergrande Real Estate.
On Aug. 2, Leo Group reported that Evergrande Real Estate owes Media V advertising fees of 71.23 million yuan and 16.19 million yuan in overdue payments.
OUR TAKE
1. Evergrande is China’s leading real estate company and has close ties with the CCP government. The CCP will not let the company’s debt crisis explode lest it trigger serious risks in the property and financial sectors, which in turn would endanger regime security.
However, Evergrande’s debt is massive and the sale of some of its assets is unlikely to resolve its problems. The information we presented above also shows that the private sector is not optimistic about Evergrande’s assets, leaving state-owned assets to pick up the tab. Yet no state-owned asset is willing to admit that it is involved in Evergrande business, which suggests that they have either been sworn to secrecy or do not want to be stigmatized through association with the embattled real estate firm.
2. In our analysis of the CCP’s “three red lines” for the property sector in August 2020, we noted that the policy “will make it very difficult for property companies to both issue new debt and repay old ones,” and that the “inability of Chinese real estate companies to refinance their debt will lead to large-scale defaults and trigger systemic risks in China’s property and financial sector.”
Evergrande’s current predicament arose after the introduction of the “three red lines,” all of which it was in breach. The company quickly ran into liquidity problems once securing funds became an issue, and it was forced to issue commercial papers instead of taking bank loans to pay suppliers and contractors. At the end of 2020, Evergrande had issued up to 205.267 billion yuan worth of commercial papers, or more than the combined total issued by the leading ten property companies (China Resources, Greenland Holdings, Sunac, etc.). By June 2021, Evergrande was exposed for defaulting on commercial papers. Yet by issuing commercial papers, Evergrande appeared to have shrunk its interest-bearing liabilities (commercial papers are not counted as interest-bearing liabilities) and was working its way behind the “three red lines” on paper. In reality, Evergrande’s debt problems remain.
Evergrande’s inability to pay its bills is not just a dilemma for the company alone. We noted above recent cases of companies seeking payment from Evergrande. There are also stories circulating on the internet of smaller suppliers and building contractors complaining about Evergrande defaulting on payments and commercial bills. Such stories are clear warning signs of an impending crisis.
3. Perhaps what is most troubling about Evergrande’s debt crisis is the lack of clarity on exactly how bad it is given that it appears to have kept a good portion off the books. Then there are deals that are structured not to look like liabilities, but which can and should technically be considered as such. For instance, if Evergrande sold 40 percent of its equity on a real estate project and promised to repurchase the shares at 120 percent of the price in two years, the company is actually nursing debt with 20 percent interest rather than engaging in equity financing. The deal is only reflected on its balance sheet two years later when Evergrande delivers the property and repurchases the 40 percent stake after a consolidation of financial reports.
Evergrande’s obscuring of liabilities becomes clearer in comparing the ratio of contract liabilities and realized revenue of Evergrande and Country Garden, the second largest real estate firm. In 2020, Evergrande’s contract liabilities were 185.7 billion yuan and its realized revenue was 507.2 billion yuan for a ratio of 0.36. In contrast, Country Garden posted more reasonable-looking numbers, with 695.6 billion yuan in contract liabilities and 462.9 billion yuan in realized revenue for a ratio of 1.5.
4. The CCP has to get Evergrande’s debt risks in order, prevent cross defaults, and the triggering of a regime-wide debt crisis. China’s debt crisis will likely worsen sharply with the Chinese economy facing very strong headwinds in the second half of 2021 due to the resurgence of the pandemic and other factors. The political risks facing Xi Jinping and the CCP will increase correspondingly.
