SinoInsight 1
March 1
Bloomberg News reported 43,689 net departures from Hong Kong in the past fortnight that the article was written, citing government statistics. Bloomberg cited Bank of America (BofA) analysts as estimating the departure of 2 to 3 percent of Hong Kong’s population every month in a scenario where the current COVID-19 outbreak in the city peaks late in the second quarter of 2022. Previously, several news outlets reported an exodus of expats from Hong Kong due to the city’s very strict COVID restrictions.The Bloomberg article also noted that “sentiment among investors is deteriorating” ahead of the U.S. Federal Reserve’s upcoming interest rates rise, which will “increase the cost of mortgages in Hong Kong and pressure home prices, which the BofA predicts will drop as much as 10 percent.” The article further noted that the Hang Seng Index fell to its lowest level since March 2020 last week with bearish speculators driving about 16 percent of total activity in Hong Kong’s equity market.
March 2
China is planning to relax its “zero-COVID” policy, according to a The Wall Street Journal report. PRC officials are “looking into the use of travel bubbles modeled on measures taken during the Winter Olympics, collecting data on new antiviral drugs and scouting sites abroad for future production of homegrown Chinese mRNA vaccines,” according to the report, citing people familiar with the matter.
Two of the people also noted that COVID-19 controls will not be eased before spring 2023, but “experimental opening measures could arrive in select cities as early as this summer.”
March 4
Zhang Yesui, a National People’s Congress spokesman, said that the goal of “dynamic zero-COVID” (動態清零) is not the pursuit of “zero infections” though “maximum results, minimum costs, fast and accurate whole-chain prevention and control measures,” but to bring the epidemic in China under control as quickly as possible.
Zhang added that “the facts have proved” that “dynamic zero-COVID” measures are suited to China’s “actual situation,” with the approach “correct” and effect “good.” He also bragged that China is “one of the most successful countries in the world in terms of epidemic prevention” based on confirmed cases, deaths, and economic development.
Outbreaks
Hong Kong
1. Per government data, Hong Kong saw a record 52,523 COVID cases on March 4. The seven-day average (Feb. 26 to March 4) at that point was 39,265.0 cases per day, a three times increase from the 12,417.1 cases per day over the previous seven days (Feb. 19 to Feb. 25).
Cumulative cases in Hong Kong exceeded the 400,000 mark (403,080) on March 4, surpassing the 109,092 cumulative cases in mainland China. Cumulative deaths crossed the 1,000 mark at 1,494.
2. Hong Kong has seen five COVID waves since late December 2022. The Hong Kong government notes that both Delta and Omicron strains of the coronavirus are spreading simultaneously.
The epidemic situation in Hong Kong worsened significantly after the Lunar New Year holiday. On Feb. 9, Hong Kong reported 1,161 confirmed cases, crossing the 1,000 mark for the first time. Confirmed cases crossed the 10,000 mark at 10,010 on Feb. 25. The shortage of isolation wards meant that patients had to be wrapped up in blankets and placed outside hospitals.
The fierce outbreak saw the Hong Kong government postpone elections for the city’s chief executive from March 27 to May 8. On Feb. 22, incumbent chief executive Carrie Lam ordered three rounds of mass compulsory testing for the city.
Earlier, Lam noted the difficulties of adhering to the mainland’s “dynamic zero-COVID” measures in a press conference. This led observers to speculate that tightening epidemic restrictions in Hong Kong was an indicator of the city government’s loyalty to Beijing. The PRC government has dispatched several medical teams to Hong Kong since Feb. 19, while senior mainland officials led by State Council Hong Kong and Macau Affairs Office director Xia Baolong are reportedly managing the city’s COVID response from a villa in Shenzhen.
The current outbreaks in Hong Kong under stricter COVID restrictions contrast sharply with the situation at the onset of the pandemic. Hong Kong saw as many as 2.64 million mainland tourists from January to February 2020, and the local government had not yet tightened entry to the city despite calls to do so by the public. Further, Carrie Lam had ordered most officials not to wear masks (with the exception of frontline staff or those who were ill) to conserve supply. However, Hong Kong only saw 1,000 total infections until April that year.
Mainland China
1. According to videos circulating on Chinese social media, the Qingdao City local government locked down a district and designated it a medium-risk area on March 2 after a bus driver and his relatives living there were found to be confirmed COVID-19 cases. Local residents were ordered to queue up overnight for compulsory testing.
The next day, the Qingdao local government said during a press conference that the gene sequencing showed that the viral strain of the local case was different from cases known in Qingdao, Shandong Province, other parts of China, and imported cases.
2. On March 3, the Shanghai No. 10 Hospital announced the suspension of outpatient and emergency medical services until further notice. At the time of writing, at least eight hospitals in Shanghai had urgently suspended outpatient services, according to mainland media reports.
OUR TAKE
1. Xi Jinping and the CCP appear to be taking steps to move China away from the highly restrictive “zero-COVID” policy, and gradually open up the mainland and Hong Kong.
We see several likely reasons for this.
First, Beijing would have observed that countries everywhere, including those with highly vaccinated populations, are seeing upticks in infections amid the Omicron wave. Several of these countries, including Europe, the United Kingdom, and the United States, have since gone on to drop coronavirus restrictions instead of locking down. Beijing could be looking to emulate those countries at its own pace with the goal of quietly building up herd immunity in the Chinese population and in the hopes that the milder symptoms of Omicron will not strain the regime’s healthcare system despite rising case numbers; in a leaked audio recording in February, Xi leadership adviser Huang Wansheng described Omicron as “the best chance of [the Chinese people obtaining] natural immunity, a rare thing, an opportunity given to mankind by God,” and estimated that countries that are removing COVID restrictions like the U.S. and Europe would hit herd immunity in March.
Second, Beijing is likely looking to boost economic activity by lifting draconian epidemic prevention and control measures. We have noted in several newsletters since late 2021 that the Chinese economy is rapidly deteriorating and is headed for a recession this year if things remain constant. Beijing also needs to stimulate consumption to rescue the property sector and avert disaster over the real estate debt crisis. Moreover, the end of “zero-COVID” would mean the return of Chinese tourists and a bolstering of the global economy, a development that indirectly helps the Chinese economy. According to a Bloomberg report, Chinese tourists accounted for nearly 20 percent of all international tourism spending in 2018 [$277 billion] and 2019 [$255 billion], while more than three-quarters (51 million) of Hong Kong’s total visitors in 2018 came from the mainland.
Third, Beijing could be thinking about alleviating growing geopolitical pressure on the PRC. International businesses, investors, and governments have been complaining bitterly about the CCP’s “zero-COVID” restrictions and warning about the political risks associated with keeping those restrictions on the books. The Xi leadership is also facing global scrutiny over its unwillingness to criticize Russia over invading Ukraine. Ending “zero-COVID” would take some of the heat off Beijing’s back as the international community is lulled by the prospect of doing business normally in China and Hong Kong again.
Beijing may look to handle Hong Kong with extra caution given the continued spread of the Delta variant in the city and the high case numbers. However, the Xi leadership would likely find a way to put Hong Kong on the path towards ending “zero-COVID” as it looks to stem the exodus of expats, keep international businesses in the city, and ease the recovery of the Hong Kong economy.
2. Xi and the CCP may not get their desired result in moving away from “zero-COVID.”
First, it is unclear what the impact of lifting restrictions would be on the Chinese populace, which has been under tight control since the start of the pandemic. The rapid spread of Omicron or earlier variants of the coronavirus could potentially overwhelm the healthcare system if there is insufficient herd immunity to begin with, leading to various social and political problems. Presently, some areas already appear to be struggling with cases, judging from reports of mainland hospitals urgently suspending outpatient and emergency medical services.
Second, the pace of economic recovery is dependent on how quickly the CCP ends restrictions and the sort of complications that follow. Currently available public information on the matter suggests that Beijing is moving away from “zero-COVID” more gradually than quickly, a decision that is likely designed to mitigate complications but could come at the cost of slower economic activity and recovery.
Then there is also the question of whether Beijing would allow Chinese residents to more conveniently travel abroad. The stringent COVID restrictions have indirectly aided the PRC authorities in preserving foreign exchange. Easing travel restrictions, however, would open a channel for capital outflows that Beijing cannot easily control.
Third, the Xi leadership has to deal with how officials implement a plan that requires finesse to see success. As we have noted on numerous occasions, PRC officials have a tendency to “prefer left rather than right,” adopt “one-size-fits-all” or “campaign-style” approaches to policy execution, and even offer passive resistance through inaction (不作爲) and “laying flatism.” Officials afraid of being “politically incorrect” could potentially vacillate between removing “zero-COVID” restrictions too quickly or barely opening up, jeopardizing the central government’s broader effort to transition to living with the virus.
Finally, the Xi leadership’s willingness to remove “zero-COVID” could be hampered by Xi Jinping’s need to preserve political achievements in a Party Congress year. Sharp upticks in cases stemming from the rollback of “zero-COVID” would reflect badly on Xi and affect his “quan wei” (authority and prestige), inviting murmurings about the Xi leadership’s capabilities from the populace and attacks from Xi’s factional rivals. Xi could scale back the relaxation of “zero-COVID” to keep cases down again, but doing so would not necessarily alleviate political and societal pressures (the pressures could even increase depending on the situation), endear him to the international community, or stem outbreaks.
SinoInsight 2
Chinese real estate developer Sunac China’s shares and bonds suddenly plummeted amid concerns about the company’s liquidity.Sunac’s Hong Kong-listed stock fell from the opening to over 17 percent at the lowest, before closing down 16.34 percent at HK$6.40 per share, a five-year low. Meanwhile, the stock of subsidiary Sunac Services closed down 7.92 percent at HK$6.63 per share. One of Sunac’s domestic bonds (“21 Sunac 03”) fell 10 percent while a U.S. dollar bond (“Sunac 7 1/2 02/01/24”) dropped more than 6 percent.
Since January 2020, Sunac’s shares have dropped 86 percent from a high of HK$46.21 per share, while the company’s market value fell from HK$250 billion to HK$34.9 billion.
According to mainland media reports, a number of Sunac creditors in multiple regions in China had been complaining on Weibo and other social media platforms recently that the property developer’s commercial papers they were holding were overdue. The overdue commercial papers have amounts ranging from tens of thousands of yuan to millions of yuan. Before the Lunar New Year period, there were media reports about people confronting Sunac over its overdue commercial papers, including stories of suppliers showing up in person to the company’s doorstep to collect debts and listed companies issuing debt collection announcements.
On Feb. 11, Moody’s Investors Service downgraded Sunac’s corporate family rating to B1 from Ba3 to reflect the company’s reduced liquidity buffer due to limited funding access and weaker operating cash flow. Moody’s also changed Sunac’s rating outlook to negative from stable.
Sunac China’s 2021 midterm report showed that the company was nearly 1 trillion yuan in debt, of which over 300 billion yuan was interest-bearing debt. This June, Sunac will have 3.8 billion yuan due in overseas debt, with observers on the lookout for repayment issues. Sunac currently has 12 U.S. dollar bonds totaling 50 billion yuan.
Sunac ranked third in overall sales (597.36 billion yuan, 4 percent year-on-year increase) out of China’s top 200 property companies in 2021. The property developer’s sales declined significantly in January 2022, with contracted sales declining 39 percent from a year ago to 27.92 billion yuan, contracted sales area down 4 percent year-on-year to 2.143 million square meters, and average contract sales prices down 17 percent from last year to 13,030 yuan per square meter.
March 1
The Zhengzhou City local government issued 19 measures to stabilize the property market (關於促進房地產業良性循環和健康發展的通知). Of the measures, the one that drew the most attention was the steep reduction in the down payment ratio (from 60 percent to 30 percent) for households applying for a second loan after settling their first home loan.
Yan Yuejin, research director of E-House Research Institute’s think-tank, told mainland media that Zhengzhou is the first city in the country to fully relax restrictions on purchases and loans this year. This is a significant bellwether for the industry because Zhengzhou is a provincial capital unlike the third- and fourth-tier cities where restrictions were loosened recently, he added. Yan also said that the Zhengzhou policy change signals continuous policy relaxation for second-tier cities.
Yan noted that Zhengzhou’s housing policy relaxation before the Two Sessions indicates that other local governments will carry out similar measures with greater initiative and urgency after accounting for local circumstances.
March 2
Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, attended a State Council Information Office press conference with the chairmen of five other large financial institutions.
Guo delivered remarks at the press conference, of which the highlights include:
- In 2021, risks in salient areas continued to be contained, with the macro leverage ratio falling by about 8 percentage points and asset expansion within the financial system returning to single digits.
- The banking sector disposed of 12 trillion yuan of non-performing assets within the past five years, of which more than 6 trillion yuan were handled in the last two years.
- High-risk shadow banks worth up to 25 trillion yuan were dismantled between 2017 to 2021, of which 11.5 trillion yuan was cut in the past two years. Shadow banks worth 29 trillion yuan still remain.
- All P2P lending platforms have ceased operations, and the outstanding loan balance dropped to 490 billion yuan. A total of 25,000 cases of illegal fundraising were filed and investigated in the past five years.
- The pension savings pilot will launch soon, while the commercial pension business for low- and middle-income people is also being prepared in earnest.
- In 2021, house prices fell, the bubbling and monetization of real estate was fundamentally reversed, and the property market was not as active as before. While current adjustments to real estate pricing and changes to the demand side are good for the financial sector, adjustments should not be too drastic or the impact on the economy will be too great, with an emphasis on smooth transitions.
- China will not participate in financial sanctions against Russia.
- Ant Group and 13 other internet platform companies involved in financial business have been undergoing rectification since 2020, with the overall progress “still relatively smooth.”
- The reform of rural credit cooperatives is progressing well, but more time is needed.
OUR TAKE
1. The above developments indicate that China’s real estate sector debt crisis and other difficulties have grown more serious. Concerns about a real estate “hard landing” and the need to create “good news” before the Two Sessions have led the CCP to ease financing restrictions.
2. Sunac China’s predicament is a chain reaction of China Evergrande’s debt crisis and a reflection of problems in China’s property sector on the whole. Sunac’s troubles with overdue commercial papers and debt repayment, as well as the troubles of other property developers reported in the press, likely represent just the tip of the iceberg.
The first quarter of 2022 will see a maturities peak for Chinese property developers, but developers are finding it harder to secure financing as defaults rise. According to Beke Research Institute data, real estate enterprises took in 85.6 billion yuan in domestic and overseas bond financing during the January-February period, a year-on-year decrease of 59 percent. Also, while the scale of domestic and overseas due debts in February was 62.4 percent (about 39.5 billion yuan) lower than in January, the scale of due debts in March and April will exceed 100 billion yuan.
Monthly contracted sales for China’s top 100 developers fell for the eighth straight month in February, or down 47 percent from a year ago, according to China Real Estate Information Corp (CRIC) data. More defaults are on the horizon if home sales remain sluggish.
The Xi leadership sought to resolve the ticking time bomb of real estate financialization through imposing loan restrictions in recent years. Ironically, Beijing’s effort is bringing the bomb closer to detonation.
3. Guo Shuqing’s recent remarks show that the PRC authorities are being forced to further relax financing restrictions to stem the decline of the property sector.
By pointing out the lower macro leverage ratio, Guo is indicating that there is now more room for leverage. Guo noting that the “bubbling and monetization of real estate was fundamentally reversed” and “adjustments should not be too drastic or the impact on the economy will be too great” is another sign that the authorities are working on a “soft landing” for the property sector.
4. The Xi leadership is caught between a rock and a hard place in addressing the real estate sector problem. On the one hand, Beijing needs to deflate the property bubble to guard against risks. On the other hand, the authorities are resorting to administrative measures (increasing restrictions on second-hand housing transactions, local governments and state-owned enterprises buying and selling their own land to keep up prices, etc.) to prop up prices and prevent sharp drops.
Domestic and external issues are also making things difficult. Xi Jinping needs to accumulate political “achievements” and minimize black marks ahead of the 20th Party Congress this year to secure a third term in office. However, Beijing has to navigate a rapidly worsening economy that will be further impacted by Russia’s invasion of Ukraine and its ramifications, as well as the “spillover effect” of the U.S. Federal Reserve’s coming interest rate hikes. Xi’s Party Congress “report card” will look terrible if he is unable to avert a “hard landing” for the real estate sector or rein in financial contagion.
