SinoInsight 1
Central government policy
May 5
Premier Li Keqiang presided over a PRC State Council executive meeting. The meeting discussed the deployment of further relief measures for medium, small, and micro enterprises and individual businesses to ensure stable employment for market entities. The meeting also determined measures to promote the stability and quality of overseas trade to help stabilize the economy, industrial chains, and supply chains.
The meeting called to strengthen support for medium, small, and micro enterprises and individual businesses, which are “an important foundation for stabilizing the economy and the backbone for stabilizing employment.” The State Council required local governments to:
1) Implement policies such as tax rebates, tax reductions, fee reductions, social security payment deferrals, smooth logistics, and policies to promote the resumption of work and production. Ensure that all tax credits and refunds are completed before June 30.
2) Increase policy support, and especially financial support:
- Large state-owned banks will increase 1.6 trillion yuan ($240 billion) of inclusive small and micro loans in 2022 to help the private sector.
- Banks will be guided to extend, renew, and adjust loan repayment arrangements (without affecting credit records or incurring interest penalties) for medium, small, and micro enterprises and individual businesses.
- Expand the National Financing Guarantee Fund and government financing guarantee institutions’ business coverage of medium, small, and micro enterprises and individual businesses.
- Specific measures to support the healthy development of the platform economy should be introduced as soon as possible.
- All localities should set up special funds to provide medium, small, and micro enterprises and individual businesses experiencing difficulties with subsidies and relief. Local governments are encouraged to give preferential treatment to the aforementioned entities on water, electricity and gas bills, and not cut them off utilities for at least six months when they are unable to pay their bills (“欠費不停供”). Average fees for broadband and dedicated network services for medium, small, and micro enterprises will be reduced by another 10 percent.
- Local governments must comprehensively investigate the outstanding arrears owed by government business work units and large companies to medium, small, and micro enterprises before the end of May. Unless there are disagreements, the arrears will be paid off at once, and those with real difficulties making payments will have to issue a clear repayment plan before the end of June. The clearing of arrears will be a focus of the State Council’s 2022 audit and major inspections, and those found to have made fraudulent arrears payments will be strictly investigated and punished.
- It is necessary to secure orders and stabilize the imports and exports of key industries and labor-intensive industries.
- Facilitate customs clearance efficiency at sea and air ports.
- Introduce a policy to facilitate the return of cross-border e-commerce exports.
- Support the stable development of processing trade, and include the labor-intensive processing trade in the central, western, and northeastern regions to the list of industries encouraged by the state.
- Increase the investment of credit in medium, small, and micro enterprises.
- Optimize the Canton Fair and other platform services, and strengthen their linkage and promotion with cross-border e-commerce.
- Support the participation of medium, small, and micro enterprises in overseas exhibitions.
Property sector
May 5
1. The scale of bond issuance and total financing by Chinese real estate companies dropped significantly in April, according to the latest data released by China Index Academy. Also, all real estate bond issuers were central-owned enterprises and local state-owned enterprises.
- The credit bond issuance scale was 36.887 billion yuan, down 35.96 percent month-on-month and down 49.6 percent year-on-year.
- The overseas bond issuance scale was 2.885 billion yuan, up 0.94 percent month-on-month and down 80.46 percent year-on-year.
- Total financing was 84.34 billion yuan, down 19.7 percent month-on-month and down 52.1 percent year-on-year.
2. According to mainland media reports, China Evergrande chairman Hui Ka Yan announced that the company had 3.09 billion yuan in contracted sales in April and targeted the delivery of 100,000 units in May during Evergrande’s monthly work meeting.The reports also noted that Evergrande’s sales had “basically stopped” from September 2021 to March 2022, with the company only making around 20 to 30 million yuan in sales each month during that period. Moreover, Evergrande’s efforts to jump-start sales in December 2021 and February 2022 were unsuccessful.
May 6
1. The People’s Bank of China’s 2022 first quarter financial institution loan investment statistical report showed that the growth rate of RMB real estate loans, real estate development loans, and household loans at the end of Q1 2022 slowed down when compared with the end of 2021:
- The balance of real estate loans in Q1 2022 increased 6 percent year-on-year to 53.22 trillion yuan, and the pace of growth was 1.9 percent lower than that at the end of 2021.
- The balance of real estate development loans decreased 0.4 percent year-on-year to 12.56 trillion yuan, with a 1.3 percent lower pace of growth than that at the end of 2021. The 290 billion yuan increase in total real estate development loans in Q1 2022 was 441.4 billion yuan more than the increase in Q4 2021.
- The balance of personal housing loans increased 8.9 percent year-on-year to 38.84 trillion yuan, with a pace of growth 2.3 percent lower than that at the end of 2021.
- The balance of household loans increased 10.1 percent to 72.37 trillion yuan, and the pace of growth was 2.4 percent lower than that at the end of 2021. Total household loans increased by 1.26 trillion yuan in Q1 2022, a year-on-year decrease of 1.3 trillion yuan.
State media China Business Journal (CBJ) reported that 19 of 22 Chinese cities that implement a centralized land supply policy released relevant information about their centralized land auctions. Of the 19 cities, 14 had completed their first round of auctions, according to CBJ. CBJ added that various data showed that the first round of centralized land auctions this year was lukewarm in many places, including a significantly shrinking land supply and transaction scale, low land auction premiums and failed auctions, and state-owned enterprises and central-owned enterprises purchasing over 70 percent of the land on auction.
In reviewing the relevant information on centralized land auctions released by the 19 cities, Zhuge Zhaofang’s Housing Data Research Center (henceforth referred to as “Zhuge”) found that there were 443 residential plots with a total planned construction area of 44.1235 million up for bidding in the first round of centralized land auctions in 2022, or down 45.04 percent and down 56.20 percent respectively from a year ago.
Zhuge also found that the 14 cities that completed their first round of centralized land auctions sold a total of 280 residential plots with a planned construction area of 25.57 million square meters, a “significant decrease” when compared to a year ago, according to CBJ.
CBJ reported that the 14 cities that completed their first round of centralized land auctions had an overall average premium rate of just 5.43 percent (compared with 14.8 percent in 2021), while the overall failed auction rate was 15.59 percent (compared with 6.2 percent in 2021). Two of the 14 cities had premium rates of more than 10 percent, with Shenzhen’s premium rate coming in tops at 15 percent. Of the 14 cities, six had zero failed auctions, including Xiamen, Ningbo, Chongqing, Changsha, Qingdao, and Shenzhen. Meanwhile, Nanjing’s failed auction rate was a whooping 31.58 percent.
China Index Academy data showed that state-owned enterprises acquired 200 plots of land during the first round of centralized land auctions, or more than 70 percent of the total land acquired, while private enterprises only acquired 75 plots of land.
Banking sector
May 6
State-run Securities Daily reported that a total of 61 commercial banks have issued bonds so far this year, citing data disclosed by ChinaBond.cn. The banks issued 790.65 billion yuan worth of bonds in total, a year-on-year increase of 41.42 percent. Of the 61 banks, 29 (24 are small- and medium-sized banks) issued 374.25 billion yuan worth of subordinated bonds, an increase of 82.77 percent year-on-year.
Yuan Xiaohui, a researcher at the Bank of China Research Institute, offered several reasons for the continuous increase in the scale of bond issuance by commercial banks. He said that the epidemic is resulting in more bad debts for the banks; the central government is requiring banks to issue more credit to support economic transformation and upgrading; and regulatory authorities are requiring banks to strengthen their ability to withstand risks, all of which require capital. Concurrently, the market interest rate continues to decline and the cost of issuing bonds for banks is relatively low.
Ming Ming, the chief economist at CITIC Securities, told mainland media, “Regulations continue to guide benefits to the real economy and encourage banks to increase credit allocation. At the same time, banks need to ensure their capital adequacy levels through various means in order to cope with the pressure of rising non-performing loans in the future.”
OUR TAKE
1. The economic rescue measures announced at the recent State Council executive meeting and data released by the real estate and banking sectors further affirm that the Chinese economy is in serious trouble.
Beijing is well-aware of the importance of the private sector and small- and medium-sized enterprises (SMEs) to the Chinese economy. PRC vice premier Liu He previously said that the private economy has contributed “more than 50 percent of total tax revenue, more than 60 percent of gross domestic product, more than 70 percent of China’s technological innovation, more than 80 percent of urban employment, and makes up more than 90 percent of market entities.” SMEs, however, are facing very hard times as a result of the Xi leadership’s “zero-COVID” policy and the “perfect storm” of domestic and external factors impacting the PRC. Thus, the State Council executive meeting had to introduce a raft of policies to “strengthen support” for medium, small, and micro enterprises and individual businesses in an effort to preserve the “important foundation for stabilizing the economy and the backbone for stabilizing employment.”
Meanwhile, the central government’s move to help “promote the stability and quality” of overseas trade suggests that the PRC’s “troika” of growth drivers (investments, consumption, exports) are under severe pressure. Chinese companies engaging in overseas trade are very likely losing orders and seeing the opposite of “smooth logistics” amid the pandemic and a worsening global economy, “zero-COVID” at home, and even China’s rising geopolitical risks stemming from Beijing’s “no limits” friendship with Russia as the Russia-Ukraine war drags on.
Beijing’s concerns with “smooth logistics” is another factor reflecting economic deterioration. China’s logistics industry prosperity index fell 4.9 percentage points in April from a month ago to 43.8, according to data issued by the China Federation of Logistics & Purchasing on May 5; the index has been below the 50-point mark separating growth from contraction for two consecutive months. Also, China’s warehousing index fell 0.4 percentage points to 46.5 in April.
Recent tourism data for the Labor Day holiday period (May 1 to May 3) shows declining consumption power. According to a May 5 report by the state-run Economic Daily, domestic tourism trips over the Labor Day period declined 30.2 percent year-on-year to 160 million trips, but represented a 66.8 percent “recovery” when compared to the pre-COVID period after applying a “comparable caliber.” Meanwhile, domestic tourism revenue decreased 42.98 percent year-on-year to 64.68 billion yuan, but a 44.0 percent “recovery” when compared to the period before the epidemic when a “comparable caliber” is applied.
Real estate data and the first round of centralized land auctions by 14 cities suggest that property sales and real estate sector operations have continued to worsen despite efforts by the central and local governments to relax real estate restrictions. Although land sales appear to have recovered somewhat in places like Shenzhen, only state-owned real estate enterprises with capital advantages are able to maintain operations. Meanwhile, many private property developers have seen their domestic and foreign financing, development investments, and land acquisitions shrink significantly under the trend of sharply contracting sales and RMB depreciation.
The plight of heavily-indebted Evergrande is perhaps reflective of private developers in general. The company barely made 200 million yuan in sales from September 2021 to March 2022, and only hit 3.09 billion yuan in April. With nearly 2 trillion yuan in total liabilities, Evergrande will struggle to pay off just the interest on its massive debt with its current earnings.
The property sector is still struggling to get back on its feet given poor economic conditions, Chinese residents maxing out their leverage ratios, and inadequate policy easing. The PRC government has so far focused on relaxing demand-side policy while keeping the real estate sector “three red lines” on the books and continuing to cap outstanding property loans and outstanding mortgages to total loans by banks. Meanwhile, the ability of purchase restrictions loosening to stimulate property sales is likely being tempered by high household leverage ratios. China’s official residential sector leverage ratio was 62.2 percent in 2021, but many economists believe that is in excess of 70 percent or even over 100 percent in cities with a hot real estate market. High leveraged households make it difficult for Beijing to save the property market over the short term even as local governments scramble to ease restrictions.
Property sector woes, struggling SMEs, dismal overseas trade, and the continued implementation of “zero-COVID” will in turn saddle China’s banking industry with more bad debts. Increasing bad debts is likely a key reason for the spike in bank bond issuance so far this year. We previously analyzed in the April 11 edition of this newsletter how the granting of mortgage repayment deferments by six large state banks is a sign of spreading financial contagion from the real estate debt crisis.
Should the CCP’s recent policies to rescue the economy fail to turn things around soon, the PRC will inevitably see quicker economic deterioration, shrinking finances, massive unemployment, and rising social instability.
2. The State Council executive meeting’s demand for local governments to implement “tax rebates, tax reductions, fee reductions,” clear arrears, and other policies had previously been made on a number of occasions. For instance, a State Council inter-ministerial teleconference in December 2019 noted that the central government had settled 91 percent of debts with private enterprises but local governments had cleared just 61 percent, and called for the further clearing of arrears.
The fact that the central government needs to repeatedly issue the same policies shows that the problems of “orders not leaving the gates of Zhongnanhai” (政令不出中南海) persist with minimal improvement. Local governments’ prioritization of local interests over broader regime interests will see that Beijing’s efforts to save the economy will remain empty talk.
3. The Xi leadership will be hard-pressed to revive the economy as long as the “zero-COVID” policy remains on the books. Officials steeped in the CCP’s totalitarian political culture (“prefer left rather than right,” “one-size-fits-all,” “campaign-style,” etc.) are virtually incapable of effecting nuanced implementation of policy. Many are also corrupt and have exploited “zero-COVID” conditions to profit from the epidemic in China. Thus, officials will be inclined to “unswervingly adhere to the general policy of dynamic zero-COVID” as exhorted by Xi Jinping during the May 5 Politburo Standing Committee meeting in a manner that is convenient for them and conducive to corruption. They would also “resolutely oppose all distortions, doubts and denials” that interfere with their preferred interpretation of “zero-COVID” instead of finding ways to guarantee “smooth logistics” as promoted by Li Keqiang and Liu He. When later asked to answer for poor economic results, local officials could look to blame the epidemic or their “adherence” to the “zero-COVID” policy.
The Xi leadership’s task is made more difficult by external factors, including the “spillover risks” of the U.S. Federal Reserves’ anti-inflationary measures (raising rates and shrinking balance sheet) and the poor global economy. Our view of China’s economic prospects continues to be very pessimistic.
SinoInsight 2
During a Politburo Standing Committee on May 5, Xi Jinping urged officials to “profoundly, completely and comprehensively understand the epidemic prevention and control policies set by Party Central,” and “always keep a clear head, unswervingly adhere to the general policy of dynamic zero-COVID, and resolutely oppose all distortions, doubts, and denials.”
Subsequently, official mainland media, government agencies, and the military published articles echoing and supporting Xi’s stance on “zero-COVID.” Shanghai Party secretary and Xi ally Li Qiang also issued a “military order” to “win the battle to defend Shanghai.” Major state media republished those articles.
May 6
1. The official website of the Central Commission for Discipline Inspection and National Supervisory Commission published a lead article titled, “Resolutely Implement the Decisions and Deployments of Party Central From the Height of the ‘Two Safeguards’” (從“兩個維護”高度堅決落實黨中央決策部署).
The article urged Party Committees, governments and sectors of society at all levels to “stand at the height of the ‘Two Safeguards’” (i.e. follow Party boss Xi Jinping’s orders), “align their thinking and actions with the decisions and deployments of Party Central,” and “consciously maintain a high degree of ideological, political and action consistency” with Party Central with Comrade Xi Jinping at the core. The last two points were taken almost verbatim from the May 5 Politburo Standing Committee meeting.
The article further cited the Politburo Standing Committee meeting in calling on officials to have a “profound, complete, and comprehensive understanding of the epidemic prevention and control policies set by Party Central,” and “always keep a clear head, unswervingly adhere to the general policy of dynamic zero-COVID, and resolutely oppose all distortions, doubts, and denials.”
In concluding, the article warned that political supervision will follow Party Central’s policies and deployments. The anti-corruption authorities will “ensure that the decisions and deployments of Party Central are implemented without bias, without variation, and without distortion.”
2. The PLA Daily published a front page article titled, “Resolutely Consolidate the Hard-won Epidemic Prevention and Control Achievements” (堅決鞏固住來之不易的疫情防控成果).
The article opened with the line, “Persistence is victory, persistence leads to victory, persistence will surely win.” The article concluded, “‘We must build up confidence and we will definitely win.’ All levels of the military must earnestly study and implement Chairman Xi’s important speech and spirit, consciously maintain a high degree of ideological, political, and action consistency with Party Central, the Central Military Commission, and Chairman Xi.”
3. Party mouthpiece People’s Daily published a commentary article on page two titled, “Unswervingly Adhere to the General Policy of ‘Dynamic Zero-COVID’” (毫不動搖堅持“動態清零”總方針).
4. Shanghai Observer, a mainland media outlet under the Shanghai Municipal Party Committee, published a report titled, “Resolutely Win the Battle of Greater Shanghai! Li Qiang Calls of Invigorating Spirits, Makes Military Pledge During Mobilization Meeting” (堅決打贏大上海保衛戰！動員大會上，李強要求振奮精氣神、立下軍令狀). (Note: A “military pledge,” or 軍令狀, refers to the practice in dynastic China of military commanders issuing a written pledge to accomplish certain military objectives on pain of punishment [often death] in the event of failure.)
The report said that Shanghai municipal Party Committee and local government had held a mobilization teleconference meeting that night on the topic of “resolutely winning the Greater Shanghai Defense Battle.”
Shanghai Party secretary Li Qiang stressed during the meeting the need to “thoroughly implement the spirit of General Secretary Xi Jinping’s important speech at the Politburo Standing Committee meeting,” and “fully understand the importance and urgency of winning the battle to defend Shanghai from a political and overall perspective.” Li called on officials to “unswervingly adhere to the general policy of ‘dynamic zero-COVID,’ further strengthen [our] confidence, make [our] resolve firm, invigorate [our] spirit, make [our] military pledge, overcome all difficulties, charge and attack, and strive for victory in the battle to defend Shanghai.”
Shanghai mayor Gong Zheng urged officials to move faster, more urgency, and more effectively in epidemic prevention and control work, make every effort to achieve “societal zero-COVID,” and resolutely win the battle for the defense of Greater Shanghai per the requirement of the Shanghai Party Committee. Gong added that officials must be very thorough in mass testing work and “leave no one behind.”
May 7
1. The official website of the CCDI and the NSC published a lead article titled, “Website Commentary | Profoundly, Completely, and Comprehensively Understand the Epidemic Prevention and Control Policies Set by Party Central” (本網評論丨深刻完整全面認識黨中央確定的疫情防控方針政策).
The article called on officials to have a “profound, complete, and comprehensive understanding of the epidemic prevention and control policies set by Party Central,” and “always keep a clear head, unswervingly adhere to the general policy of dynamic zero-COVID, and resolutely oppose all distortions, doubts, and denials.”
2. The PLA Daily published a lead article titled, “Unswervingly Adhere to the General Policy of ‘Dynamic Zero-COVID” (毫不動搖堅持“動態清零”總方針). The article urged all officers and soldiers to “align their thinking and actions with the decisions and deployments of Party Central and Chairman Xi, further strengthen (our) confidence, unite as one, and resolutely win the tough battle of epidemic prevention and control within the spirit of no time to lose and the action of struggling with every second.”
OUR TAKE
The CCP’s latest “zero-COVID” propaganda offensive affirms our analysis of the policy being a part of Xi Jinping’s political legacy. Even more so now than before, Xi cannot abandon “zero-COVID” without committing political suicide.
The vigorous promotion of Xi’s pet epidemic prevention policy and call to “resolutely oppose all distortions, doubts and denials” of it suggest that Xi is facing internal pushback and pressure for sticking to “zero-COVID” despite its failures in Shanghai under Li Qiang and the serious impact it has had on the Chinese economy. As Xi is essentially married to the policy, he has to promote and defend it at all costs, even if it means rolling out heavy-handed, “cult of personality”-type propaganda, as well as publicizing nonstop the “rational,” “beneficial,” and “scientific” nature of “zero-COVID.” To ensure that the policy “works,” the Xi leadership will find ways to tweak how “zero-COVID” is defined and falsify data to pave the way to declare “victory” closer to the 20th Party Congress. Meanwhile, Xi could use adherence to “zero-COVID” as a political loyalty test and determine promotions at the key leadership reshuffle this year and at the 2023 Two Sessions; as long as Xi is in office and has sufficient political strength, Li Qiang has a good chance of joining the Politburo Standing Committee.
Xi’s determination to stick with “zero-COVID,” however, will ensure the worsening of China’s socio-economic situation for the foreseeable future. The central government’s efforts to save the economy will be hugely discounted, and the resulting economic deterioration and rising social instability will in turn invite greater internal and external pressures onto Xi. Forced to win a “line struggle” against his factional rivals, Xi Jinping is increasingly placing himself in a situation comparable to Mao Zedong after the failures of the Great Leap Forward, and his personal political risks are rising exponentially.
