Updated on Dec. 8, 2021
SinoInsight 1
China Evergrande’s debt crisis continues to fester. Rumors circulating of the company’s bankruptcy and reorganization triggered market panic. Thousands of creditors are seeking repayments. Meanwhile, investors are holding protest rallies outside the Evergrande offices across the country.
Sept. 8
Investors from Henan, Chengdu, Chongqing, Jilin, Xi’an, Jiangxi, and other areas launched protests against Evergrande after the company failed to make repayments on its matured wealth management product “Hengda Wealth” (恆大財富).
About 100,000 people bought “Hengda Wealth” (estimated value of at least 40 billion yuan) according to mainland media, citing Evergrande staff who remained anonymous. Of the 100,000, 70 percent bought the product along with Evergrande property, while the remaining 30 percent are Evergrande employees or suppliers.
Sept. 10
During a press conference, Evergrande chairman Hui Ka Yan stated that it is necessary to ensure that repayments are made on all of the company’s wealth management products “as soon as possible,” and “not a penny should be lost,” according to mainland media reports
Hui said, “I can be broke, but investors of Evergrande Wealth Management cannot be broke! The repayment must be settled fairly,” with no special treatment for individuals. He added that not issuing repayments “has never happened before, and will never happen in the future. We must make every attempt to repay our investors according to the plan.”
Sept. 12
1. According to mainland media reports, Du Liang, the general manager and legal representative of Evergrande Wealth Management, was surrounded by investors protesting losses in the evening at Evergrande’s Shenzhen headquarters. Du admitted that he had redeemed his Evergrande wealth management products worth more than 10 million yuan on May 31, claiming a “home emergency” as the reason for cashing out early.
2. Evergrande executives were besieged by Evergrande employees at the company’s Nanchang office for three consecutive days and nights starting from Sept. 9, according to information circulating on social media.
Sept. 13
1. Evergrande announced three repayment schemes for investors, namely, cash in installment, repayment in property, or claim to payments on residential units, according to mainland media.
Evergrande Wealth Management general manager Du Liang said that “it is difficult for Evergrande to make 40 billion yuan of repayments at once for the wealth management products.”
2. Mainland media outlet 21st Century Business Herald obtained an official document by the Housing and Urban-Rural Development Bureau of Nanhai District in Guangdong’s Foshan City that requested “relevant units” to suspend Evergrande’s real estate mortgage registration business in Nanhai District “with immediate effect” so as to strengthen “risk prevention and control” of Evergrande real estate projects in the district.
In layman terms, Evergrande’s company in Nanhai District cannot obtain bank loans by mortgaging their property, and people who want to buy real estate from the company’s nine local projects cannot apply for bank mortgages.
3. Hundreds of investors gathered outside Evergrande’s headquarters in Shenzhen to demand their money back. Local authorities dispatched a large number of riot police to clear the area. Clashes eventually broke out and some people were arrested.
4. Evergrande issued an emergency statement in the evening denying online rumors about the company’s bankruptcy and reorganization. The statement added that the company “has indeed encountered unprecedented difficulties,” but will “resolutely fulfil our corporate responsibilities, go all-out to resume work and production, ensure the delivery of buildings, do everything possible to resume normal operations, and make every effort to protect the legitimate rights and interests of our customers.”
5. According to information circulating on social media, some Evergrande creditors reportedly dug up the ancestral grave of Hui Ka Yan’s family in his hometown in Henan. In traditional Chinese culture, digging up ancestral graves is a great insult, and represents a very bad omen for Hui regardless of the veracity of the information.
Sept. 14
1. According to a Bloomberg report, regulators from the Guangdong local government dispatched a team from King & Wood Mallesons, a law firm specializing in restructuring, to Evergrande in August. Provincial officials also sent “additional financial advisers and accountants to assess the developer” at the “urging of Beijing.”
The report also noted that the Guangdong government has “encouraged Evergrande’s major banks to set up a creditor committee, a move that would allow lenders to take over major decisions including asset disposals,” citing people familiar with the matter. The banks, however, are “reluctant to do so before getting a clear nod from national regulators.”
Guangdong officials have also turned down at least one bailout request from Hui Ka Yan, according to the report.
Last month, the PRC Financial Stability and Development Committee gave its blessing to an Evergrande plan to “renegotiate payment deadlines with banks and other creditors on a piecemeal basis.”
2. Evergrande’s board of directors announced that it had appointed Houlihan Lokey and Admiralty Harbour Capital as joint financial advisers to assess the company’s capital structure. Both Houlihan Lokey and Admiralty Harbour Capital specialize in domestic and international debt resolution and restructuring.
Houlihan Lokey was involved in Lehman Brothers and General Motors’ debt restructuring, as well as property developer Kaisa Group’s 2015 case. Admiralty Harbour Capital previously handled China Fortune Land Development and Sichuan Languang Development’s debt issues.
3. Financial rating agencies say that Evergrande seems likely to be unable to repay all of the 572 billion yuan it owes banks and other bondholders, according to various news reports. Fitch Ratings noted in a report that “in the unlikely event that a default unsettles the broader property market, significantly disrupting sales and investment, this could have farther-reaching macroeconomic effects.”
Meanwhile, S&P further downgraded Evergrande to “CCC” from “CC” with a negative outlooking. The rating agency noted the company’s reduced liquidity and default risks, including the possibility of debt restructuring.
Sept. 15
1. According to a Bloomberg report, the PRC Ministry of Housing and Urban-Rural Development told banks in a meeting this week that Evergrande will not be able to pay its debt obligations due on Sept. 20, citing people familiar with the matter.
The company is “still discussing the possibility of getting extensions and rolling over some loans,” and will miss a principal payment on at least one loan next week.
2. Evergrande executives revealed via a purchase document that Ding Yumei, the wife of Hui Ka Yan, paid 20 million yuan for the company’s high-yield investment product on July 8.
The move, which was likely intended to mollify investors after protests broke out, accomplished little to this end. One investor told The Financial Times that Ding’s investment “is a drop in the bucket for Hui’s wealth,” adding that “Hui has paid himself billions of dollars in dividends and now he is trying to get his wife to make us believe that he is on the same boat with us.” Meanwhile, mainland media outlets reported that Ding had already received repayment on her investment, citing internal documents provided by Evergrande staff.
Meanwhile, two Evergrande staff who invested more than 300,000 yuan in wealth management products told The Financial Times that their boss “threatened to have them arrested if they quit the company.” One of the employees said, “We have been kept in the dark until the last moment. Everyone is furious. We have been abandoned by the firm. All we can do is to encourage investors to protest and make this thing so big that the authorities have to step in.”
Sept. 16
Trading restrictions were placed on nine of Evergrande’s onshore bonds after China Chengxin International downgraded the company’s bonds from “AA” to “A.” Three yuan-denominated bonds valued at 28.2 billion yuan were restricted to negotiated transactions on the Shanghai exchange, while six bonds valued at 25.3 billion were restricted to high-volume block transactions on the Shenzhen exchange.
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According to Evergrande’s mid-year report, the company had 778 land reserve projects as of June 30, 2021, with an original value of 456.8 billion yuan. The company owns real estate projects in more than 280 cities, has on-balance sheet liabilities of 1.967 trillion yuan, on-balance sheet interest-bearing liabilities of 571.8 billion yuan, and cash and cash equivalent assets of 86.772 billion yuan on the books.
The report also noted that Evergrande has 240.49 billion yuan in short-term liabilities (due in one year), and that its cash and cash equivalent assets cannot cover its short-term liabilities.
According to mainland media reports, Evergrande has to pay principal and interest on 15 bonds worth $850 million yuan from next week until the end of the year. And in January 2022, the company has to make repayments on another six bonds.
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According to information circulating on the internet that appeared on Sept. 9, real estate developer Central China Group sent a report to senior ranks of the Henan provincial government in August listing its various problems and requesting assistance. The report noted that the coronavirus epidemic and floods in mid-July had severely affected the company’s many operations, including apartment and factory construction projects, cultural and tourism projects, hotels, shopping malls, car parks, etc., with estimated losses exceeding 5 billion yuan.
The report notes that Central China faces “rare difficulties, risks, and crises” that may “trigger a series of social problems,” affecting its 28,000 employees, more than 300 construction projects, and 1.2 million industrial workers. The company warned of financial risks, and expressed hope that the Henan government will assist it in collecting arrears, speeding up tax rebates, and granting relief measures like the reductions, exemptions, or deferments on payment of taxes and fees.
In the evening of Sept. 9, Central China managers confirmed that it had indeed submitted the report to the Henan government, and that the latter had provided great assistance to the company. The managers said that its current crisis had passed and many of its businesses have resumed regular operations, while the company’s debt risks are “controllable.”
Observers note that Central China’s “distress letter” to the Henan government was similar to the one sent by Evergrande to the Guangdong government last August before the latter company’s debt crisis became more obvious. On Sept. 2, rating agency Moody’s revised Central China’s rating from “stable” to “negative.”
OUR TAKE
1. The CCP is unlikely to bail out Evergrande or provide the property developer with unconditional financial assistance even as the company’s debt crisis worsens. Beijing has been trying to eradicate debt-fueled operations and other financial malpractice in the property sector for some time. Also, the Xi Jinping leadership has repeatedly stressed that “housing is for living in, not for speculation.”
A bailout of Evergrande will only send the wrong signal to debt-laden companies and lead them to believe that they can get away with unsustainable business and financial operations that are now leaving them in deep trouble. Beijing will also want to hammer home the point that it is serious about regulating the property sector and managing real estate bubble risks.
On the other hand, the CCP can hardly allow “too-big-to-fail” Evergrande to simply default and declare bankruptcy. Doing so would almost certainly trigger systemic financial risks and spark social unrest that could potentially endanger the regime. Already, Evergrande is facing protests from investors across the country. Chinese investors could even begin to grow wary of other highly-indebted property companies or financial institutions, resulting in “bank runs” and widespread protests.
The CCP will likely look to buy as much time as possible for Evergrande to resolve its debt issues while staving off a default and minimizing financial contagion. For instance, the CCP could:
a. Centralize all Evergrande-related litigation at the Guangzhou Intermediate Court (already started in August) and use judicial procedures to drag out resolution. Doing so prevents a concentrated and rapid explosion of Evergrande’s debt problem. Some of the company’s creditors could also become amenable to accepting debt restructuring deals with substantial losses as they look to circumvent lengthy legal proceedings and quickly recoup a portion of what they loaned to Evergrande so as to tide over their own liquidity and debt problems.
b. Regulators could implement administrative measures to prohibit state-owned financial institutions from recovering loans to troubled companies, and even extend the maturity period of due loans.
c. Local State-owned Assets Supervision and Administration Commissions and state-owned enterprises could purchase Evergrande’s assets at prices that are relatively higher than what private companies would bid. This helps the company secure funds to make repayments on loans and financial products.
d. Step up “stability maintenance” measures against Evergrande protesters, including violent suppression.
2. Factional struggle appears to be another factor influencing Beijing’s decision thus far not to bail out Evergrande. Xi Jinping could believe that he finally has sufficient power after years of consolidation to “bite down on bone” and “turn the knife inward” to target key strongholds swayed by his political rivals like the Jiang Zemin faction and influential Party princelings. Thus, Xi is strengthening his control over the military through personnel reshuffles and promotions; rectifying the political and legal affairs apparatus, and finally getting serious about “rectifying chaos” in the financial and property sectors. Xi is likely seeking a more permanent solution to the factional struggle problems that have plagued him since he took office in 2012, and secure a norm-breaking third office term at the 20th Party Congress in 2022.
The Xi leadership’s current approach to resolving property sector woes appears to be guided by Xi Jinping’s political stance on the issue. In differentiating his rule from the legacy of the Jiang faction’s era of dominance (1997 to 2012), Xi stressed that “housing is for living in, not for speculation.” However, property developers like Evergrande barely complied with Beijing’s orders until regulators issued the “three red lines” last year to “rectify chaos” in the property sector.
Xi’s political stance also sharply raises personal risks for Evergrande founder Hui Ka Yan. While the Xi leadership has been stressing the need for financial responsibility and even austerity amid challenging conditions in recent years, Hui and Evergrande continued their heavily debt-fueled operations and even the payout of dividends at levels far exceeding those of other industry leaders to its shareholders.
From 2016 to present, Evergrande issued dividends 11 times, paying out a total of HK$69.5 billion with a rate of 43.71 percent. The Hui family took more than 70 percent of dividends paid out, particularly in 2019 when it took approximately HK$14.768 billion of the HK$20.8 billion in dividends paid out. In other words, Hui Ka Yan and his family profited richly from Evergrande’s debt operations by way of dividends, while leaving the Xi leadership to worry about the company’s debt risks and financial contagion. Even when Evergrande’s debt crisis was worsening, the company still announced a “special dividends” plan along with its 2020 annual financial report on March 30 this year. However, Evergrande later cancelled the dividends plan on July 27 following government intervention; S&P had downgraded the company and its subsidiaries a day earlier. As Evergrande’s crisis deteriorates further, Hui Ka Yan is at risk of being arrested as the Xi leadership looks to make a political point.
Xi’s “rectification” campaign will compel his factional rivals to push back. The Jiang faction and others in the “anti-Xi coalition” are capable of opposing Xi in the financial arena where they still have influence. We do not rule out the possibility that Xi’s rivals were behind recent rumors of Evergrande’s bankruptcy and reorganization as they strive to create financial turmoil in China and advance their efforts to oust Xi. Xi’s enemies could also find ways to interfere in the new Beijing Stock Exchange or cooperate with Xi’s international opponents to launch a “financial coup” against the Xi leadership. “Perish together” factional struggle in the Party elite will create conditions for political Black Swans to emerge in China.
SinoInsight 2
Sept. 9
Chen Yixin, the Central Political and Legal Affairs Commission (CPLAC) secretary general, called on central and provincial political and legal affairs education and rectification offices to pay attention to “eight shortcomings and weaknesses” (八個短板弱項) in the rectification campaign.
One of the eight “shortcomings and weaknesses” was addressing the issue of “not thoroughly purging poisonous influence” and resolutely eliminating the influence of former security czar Zhou Yongkang, former vice minister of public security Meng Hongwei, former vice minister of public security Sun Lijun, and others.
Analysis: Chen Yixin emphasizing the need to root out the “poisonous influence” of Jiang faction members Zhou Yongkang, Meng Hongwei, and Sun Lijun indicates that the Jiang faction still retains troubling influence in the political and legal affairs apparatus, and the Xi leadership has marked the “cleansing” of such influence as an important goal of the ongoing education and rectification campaign.
Sept. 10
Deng Huilin, the former deputy mayor and police chief of Chongqing City, stood trial at the Baoding City Intermediate People’s Court on charges of taking bribes. During the trial, Deng pleaded guilty and expressed remorse.
Sept. 11
1. The Ministry of Public Security (MPS) Party Committee issued a notice regarding the establishment of a leading group for retired ministry officials. The notice said that the leading group will “further strengthen and improve” the work of retired ministry cadres and those from work units directly under the ministry’s command, with the goal of creating “effective unity and cohesion” in the retired cadre team.
Analysis: The MPS leading group for retired ministry officials appears to be a new “stability maintenance” organization to keep retired public security officials in line under the guise of looking out for their interests. Beijing is perhaps concerned that retired political and legal affairs officials could panic and protest given that about 50 percent of officials investigated under the education and rectification campaign are cadres who are retired or about to retire. Thus, the leading group has been set up to pacify retired cadres in the name of building “effective unity and cohesion,” as well as prevent them from resisting the central government.
2. State mouthpiece Xinhua reported that the second segment of the national political and legal affairs education and rectification campaign is currently underway, with 16 central supervision teams stationed in the places they are inspecting. Also, the central supervision group has set up special post boxes in all 31 provinces and cities to receive complaints, including reports of political and legal affairs officials interfering in judicial affairs, meddling in cases, acting as judicial brokers, interfering in economic disputes in violation of the law, interfering in construction projects in violation of the law, and the family members of cadres using the authority or influence of cadres to engage in business activities.
Sept. 13
1. CPLAC secretary Guo Shengkun presided over a meeting of the National Political and Legal Affairs Education and Rectification Leading Group. Guo stressed that all work units, and especially the leading officials (“一把手”) of those units, must shoulder “major political responsibility” and ensure that the second segment of education and rectification work “is carried out with higher standards and more stringent requirements.”
2. More than 200 military veterans from across the country gathered outside the veterans affairs department office at the Central Military Commission in Beijing to protest. The local police stepped in to break up the protest, and 137 veterans were arrested and held in Jiujingzhuang Custody and Repatriation Station.
Analysis: The CCP has always been very wary of veterans given their military training and discipline. Beijing has used both carrot and stick to keep veterans in line; the Xi leadership has increased veteran benefits in recent years while stepping up surveillance of veterans and violently suppressing protests. For instance, the Beijing “stability maintenance” authorities got tough on the roughly 10,000 veterans who surrounded the Central Military Commission headquarters in October 2016 to demand better treatment. And in 2018, the authorities exploited a protest by over a thousand veterans in Jiangsu’s Zhenjiang City to provoke a violent conflict and arrest a batch of core protesters, making it very difficult for veterans to organize further demonstrations.
Given the CCP’s tightened control over veteran affairs, it is no mean feat for the 200 veterans to gather outside the CMC headquarters in Beijing in the recent protest. We do not rule out the possibility that disgruntled political and legal affairs officials deliberately relaxed their surveillance and control over military veterans to allow the incident to occur.
Sept. 14
“Shang Xian Lao Hou” (“商賢老侯”), a self-media column on the mainland portal NetEase, published an internal “morning meeting circular” (早會通報) regarding the “judicial mafia” (司法黑幫) in Jiangsu Province headed by former captain of the criminal police corps of the Jiangsu Provincial Public Security Bureau Luo Wenjin. The “circular” was sent to the Central Commission for Discipline Inspection, the Discipline Inspection Commission of the Ministry of Public Security, Beijing-based members of the Jiangsu Provincial Discipline Inspection Commission, and Beijing-based members of the Jiangsu Provincial Party Committee.
The “Shang Xian Lao Hou” article noted that Yan Ming, the former executive deputy procurator general of the Jiangsu Provincial People’s Procuratorate who was official investigated half a month before Luo Wenjin was officially probed (March 2, 2021), had confessed Luo’s illegal dealings with Deng Huilin (former Chongqing vice mayor and police chief) and Lai Xiaomin’s (former chairman of China Huarong Asset Management) group. And on Oct. 24 2020, or about two months after unofficial investigations were launched against Yan Ming, Wang Like (pronounced “lee kuh”), Party Secretary of the Jiangsu provincial Political and Legal Affairs Commission and Luo Wenjin’s superior, had “voluntarily” submitted himself for investigation for “serious violations of discipline and law.” The article noted that Wang Like and former Chongqing public security bureau chief Wang Lijun “had interactions.”
The article added that Luo Wenjin and Deng Huilin, both natives of Wuhan, had “scratched each other’s back” (互通有無), had “improper discussions of Party Central’s major policies” (妄議中央大政方針), and “insulted key national leaders.” They even planned mischief during a visit by a “national leader” to a commemorative event in Nanjing, but were prevented from executing their “sinister activity” by Ministry of State Security personnel.
The article accused Luo Wenjin of organizing a “mafia” in Hubei Province with fellow police officers. Luo’s “mafia” reportedly colluded with the president of a commercial bank to obtain low-interest bank loans to engage in loan sharking, and even threatened personnel in the Central Commission for Discipline Inspection, Ministry of Public Security, Ministry of State Security, and in military intelligence.
In concluding, the article wrote that the CCP authorities will advance an in-depth investigation into the Luo Wenjin case and “completely remove” the influence and “residual poison” of Deng Huilin and Liao Xiaomin in Jiangsu Province.
Analysis: The “Shang Xian Lao Hou” article exposes very serious corruption and factionalism problems in the political and legal affairs apparatus. In particular, the revelation that Luo Wenjin and his clique threatened the safety of personnel in key central government agencies suggests that the factionalism problem represents a severe threat to the PRC’s financial security and the overall security of the CCP regime in general.
OUR TAKE
1. Xi Jinping has been cleaning up the Jiang faction-swayed political and legal affairs apparatus almost since the launch of the anti-corruption campaign in 2013. Xi has made in-roads over the years with the takedown of Jiang faction lieutenant Zhou Yongkang and other cronies of the faction. However, rectification of the political and legal affairs apparatus has proceeded relatively slowly, possibly because the elements opposed to Xi in the apparatus have pushed back against the Xi leadership whenever rectification efforts heat up (the Lei Yang Incident, military veterans surrounding the CMC building, the Shaanxi 100 Billion Mining Case, etc.), and because Beijing is still reliant on the apparatus to control society and “maintain stability.”
Despite the political risks associated with rectifying the political and legal affairs apparatus, as well as other volatile risks in the regime like China Evergrande’s debt crisis, Xi has no choice but to double down on eliminating the Jiang faction and its lingering influence in the apparatus. Xi is pushing to serve another term as CCP General Secretary at the 20th Party Congress in 2022, and he cannot allow rival elements in the political and legal affairs apparatus wriggle room to create turmoil and sabotage his third term chances. The Jiang faction and elements opposed to Xi in the political and legal affairs apparatus, however, will not simply submit to Xi trampling over them, and will likely seek to stir trouble for Beijing in the lead up to the 20th Party Congress.
2. Factions in the CCP are built on patron-client relations, with lower ranking officials looking to curry favors with their superiors to enjoy a good career and higher ranking officials accumulating supporters in the lower ranks to boost their political power. Corruption runs both ways and is often covered up. Anti-corruption agents determined to find malfeasance will definitely find guilty parties, and investigation of lower ranking officials will almost certainly implicate their higher-ups, including those perched at the top of patron-client networks.
Given the nature of patron-client relations in the CCP and how anti-corruption work has proceeded under Xi Jinping (building a case against higher ranking officials through probing lower ranking officials), Xi is likely laying the groundwork with the ongoing national political and legal affairs education and rectification campaign to take down “big tigers” in the political and legal affairs apparatus. The Luo Wenjin “judicial mafia” exposé and recent trial of Deng Huilin also signal Xi’s resolve in purging the top echelons of the political and legal affairs apparatus as Xi seeks to remove potentially destabilizing factors who could block his bid for a third office term next year.
The recent trial of Deng Huilin is likely meant to be the opener to rectification of even bigger fish in the political and legal affairs apparatus. Deng’s confession and repentance signals to the other officials in the apparatus that they should not challenge the Xi leadership—or else. We believe that other recently investigated officials at Deng’s rank (deputy ministerial level), including former Shanxi Public Security Bureau director Liu Xinyun (investigated on June 14, 2020) and former Shanghai Public Security Bureau director Gong Daoan (investigated on Aug. 18, 2020), could subsequently be put on trial and get “upheld” as negative examples that political and legal affairs officials should not emulate. Notably, Deng, Liu, and Gong are accused of being involved in “intra-Party cliques and factions” (參與在黨內搞團團伙夥), which sends a warning to other disloyal elements in the political and legal affairs apparatus that they will be next should they persist in factionalism frowned upon by the Xi leadership. Beijing will likely use the dirt exposed from investigating Deng and others like him to bring down political and legal affairs officials at the provincial level and above, including those in the central government.
3. Beijing piloted the national political and legal affairs education and rectification campaign back in July 2020, or about a month after Deng Huilin was officially investigated. Deng’s arrest also led to a sweep of the Jiangsu political and legal affairs apparatus and the downfall of Jiang faction officials like Wang Like. It is possible that investigations into Deng and others revealed that the factionalism problem in the political and legal affairs apparatus was more serious than Beijing previously presumed, and convinced Xi Jinping to press ahead with the current rectification campaign.
