SinoInsight 1
Financial sector corruption
June 16
Fu Fei (age 51), former director of the risk disposal and legal affairs department of the state-run China Insurance Security Fund Co. Ltd. (CISF), was investigated. He is the first CISF to be investigated in recent years.
Fu joined Anbang Insurance Group in February 2018 as a member of the government team that took over the company following the prosecution of former Anbang chairman Wu Xiaohui. At the time, CISF injected 60.8 billion yuan into Anbang as part of the restructuring effort. In June 2019, Anbang’s assets were transferred to Dajia Insurance Group due to the restructuring; CISF owns 98 percent of Dajia.
June 17
Fu Xiaodong (60), a senior expert of the Henan Branch of China Development Bank and a former Party secretary and president of the bank, was investigated.
June 18
Wei Jie (59), vice chairman of Zhongyuan Bank, was investigated.
Earlier on June 10, the PRC authorities officially investigated Dou Rongxing (former chief development consultant of Henan Investment Group), the Party secretary and chairman of Zhongyuan Bank from December 2014 to August 2021.
Financial risks of small- and medium-sized banks
June 18
The Xuchang Municipal Public Security Bureau in Henan Province issued a police statement noting that it had opened an investigation case into Henan Xincaifu Group (河南新財富集團投資控股有限公司) on April 19, 2022. Xincaifu Group is suspected of committing “major crimes.”
The police statement added that a preliminary investigation found that a criminal gang headed by Xincaifu Group’s actual controller, a person surnamed Lü, is suspected of having taken advantage of village banks to commit a series of serious crimes since 2011. The statement also reported that “positive progress” had been made in the investigation, with the public security authorities having arrested a group of criminal suspects, as well as seizing and freezing funds and assets involved in the case “in accordance with the law.”
Background: According to mainland media reports, Lü Yi is the full name of the Xincaifu Group’s actual controller. Lü used hundreds of companies under his control to take up stakes in a number of city, rural, and village commercial banks across China. Incomplete statistics compiled by mainland media found that Lü and Xincaifu Group together controlled as many as 30 banks.
Mainland media also exposed Lü Yi for being a “invisible major shareholder” in Zhongyuan Bank and the four Henan banks who froze depositors’ accounts in April. In a May 20 press briefing, a “relevant person-in-charge” at the China Banking and Insurance Regulatory Commission said that the major shareholders of the four Henan banks are suspected of violating the law by siphoning funds from the public by offering fixed deposits on third-party fintech platforms, using so-called “money brokers” (資金掮客), and other methods.
Zhongyuan Bank was formed on Dec. 10, 2013 with the merger of 13 city commercial banks. Shareholders in Zhumadian Bank, one of the 13 banks, are associated with Xincaifu Group, according to mainland media. Xincaifu Group is also closely associated with the Bank of Luoyang and the Bank of Pingdingshan, which merged with Zhongyuan Bank in February and April this year, respectively.
Mainland media cited people familiar with the matter as saying that “Boss Lü,” the person behind Xincaifu Group, is “very powerful.” Those cited added that executives of the Bank of Pingdingshan are on good terms with Lü Yi. According to publicly available information, Niu Junbin, the former Party secretary and chairman of the Bank of Pingdingshan, was sentenced to 12 years in prison in 2018 for accepting more than 50 million yuan in bribes.
This February, Lü Yi was taken away for several months to assist in the investigation of former China Banking Regulatory Commission vice chairman Cai Esheng, who was arrested for accepting bribes. Lü, a naturalized citizen of Cyprus, left for America some time after he was released from the Cai case, according to mainland media.
June 20
1. The four Henan banks that froze the accounts of customers who purchased deposit products online from April—Shangcai Huimin Country Bank, Zhecheng Huanghuai Community Bank, Yu Zhou Xin Min Sheng Village Bank, and New Oriental Country Bank of Kaifeng—each announced on their official website that customer fund information registration work would be henceforth carried out online “according to the requirements of the [government’s] financial management department.”
Customers of the four banks who were looking to do online registration work were directed to the same portal. The portal contained a “customer information registration form” requiring the submission of basic personal information and detailed relevant “product information” (that is, bank deposit products purchased online by depositors). Under the “transaction channels” section, bank customers could select from four rural bank self-operated channels (mobile banking, online banking, WeChat app, official WeChat account) and more than 30 third-party fintech platforms.
According to mainland media reports, depositors of the four Henan banks who visited the online portal and submitted their information in the morning of June 20 found that their checking balance showed 0 yuan in the afternoon. Some depositors who did not submit their information via the online portal also encountered a similar situation. Moreover, those who submitted their information found that their balance was set to zero yuan regardless of whether they selected rural bank self-operated channels or third-party fintech platforms under the “transaction channels” section of the “customer information registration form.” Those depositors later reported that their checking balances had reverted to normal.
2. A video of a bank setting an extremely low withdrawal limit on a depositor’s account went viral on the Chinese internet and was reported by mainland media.
In the video, a man who works in Shenzhen and has property in Guangdong’s Jiujiang Town was told by the bank staff at the Agricultural Bank of Jiujiang Town that the bank’s system had automatically limited him to withdrawing just 1,000 yuan a day. The man expressed great displeasure at the situation and demanded that the bank state what legal basis it had to impose the withdrawal limit; the bank staff could not provide an answer.
After the video went viral, the Agricultural Bank of China customer service said in response to media inquiries that it does not impose 1,000-yuan withdrawal limits on individual depositors. The bank’s customer service added that “local requirements” could be the reason for the 1,000-yuan withdrawal limit, if one was imposed.
Alvin Chau case set for trial
On June 21, the Macau Daily reported that Suncity Group Holdings’s former CEO Alvin Chau is scheduled to go on trial at the Primary Court of Macau (Tribunal Judícial de Base) on Sept. 2. Chau will reportedly be charged with carrying out illegal gambling operations, immense fraud, running criminal groups (19 other suspects are involved in this, all of whom are mid- or high-level Suncity employees), and aggravated money laundering. The prosecution also summoned more than 90 witnesses for the Chau case.
The Macau Daily report elaborated that Alvin Chau used the VIP gaming rooms at Suncity to run illegal “betting on the bottom side” (賭底面; or under-the-table leveraged side betting) operations. Chau’s operations resulted in losses for six major gambling companies and reduced tax revenue for the Macau Gaming Inspection and Coordination Bureau. Chau faces 229 counts of “illegal gambling in a licensed place,” 54 counts of “considerable fraud,” and three counts of “attempted considerable fraud.”
Chau is also accused of operating telephone betting and online betting in casinos in the Philippines and Vietnam without obtaining government approval. According to mainland media, Alvin Chau’s Suncity Group has been operating online betting platforms for many years, and those platforms have accepted bets from the mainland to the tune of more than 100 billion yuan a month and over 1 trillion yuan a year. Mainland media also note that large amounts of renminbi have flowed out of China through underground channels (like Chau’s online betting platforms) each year, causing great harm to China’s social and economic order, as well as endangering financial security.
OUR TAKE
1. The recent financial sector corruption and bank trouble developments detailed above further expose the depths of the PRC’s financial risks. The financial problems of small- and medium-sized banks appear to be particularly serious, and are likely to escalate and trigger systemic financial risks in China.
As we noted in a previous newsletter, six rural banks in Henan and Anhui froze the accounts of over 400,000 depositors from around mid-April and those accounts are estimated to hold more than 40 billion yuan, according to mainland media reports and information circulating on Chinese social media. The depositors stand to lose the entirety of their savings if the CCP authorities consider their purchase of deposit products through third-party fintech platforms to be “fraudulent” or “illegal fundraising.” Per regulations passed on May 1, 2021 governing the prevention and disposal of illegal fundraising (防範和處置非法集資條例), participants of “illegal fundraising” have to bear all losses themselves.
However, the authorities may find it hard to dismiss the claims of depositors of the troubled banks as entirely “fraudulent.” For one, those depositors would have successfully settled transactions and transfers with other banks in purchasing deposit products or withdrawing cash; it is impossible for transactions and transfers to go through if those depositor accounts were fraudulent.
The CCP authorities find themselves caught between a rock and a hard place on the matter of resolving the troubled rural banks crisis.
Treating what happened with troubled rural banks in Henan and elsewhere as cases of fraud will seriously undermine the CCP’s political legitimacy and cause a crisis of confidence in governance. Doing so is tantamount to an admission that the PRC government, with its tight surveillance over society, somehow failed to track a 40 billion yuan-scale unregulated financial system and bring it to heel before serious damage was done.
On the other hand, if the CCP authorities choose to treat the over 400,000 depositors who bought products online as regular depositors, then the troubled rural banks would be liable for the more than 40 billion yuan in deposits that they are estimated to be holding. It is unlikely, however, that those troubled banks have deposits in excess of 40 billion yuan. For instance, publicly available information shows that three of the four troubled Henan banks only have between 1 billion yuan and 2 billion yuan each in deposits, while the remaining one bank has deposits of under 3 billion yuan. And if those banks actually had over 40 billion yuan in deposits on the books, the central authorities would have stepped in long ago to investigate because the amount does not match the scale of the local economies that the banks are situated in and are supposed to serve. A likely reason for the discrepancy between actual deposits held by the troubled banks and the estimated deposits associated with the case is that Xincaifu Group and its actual controller Lü Yi siphoned off the bulk of the deposits that were supposed to be held by the banks.
The troubled rural banks face bankruptcy if they are unable to make available the funds being demanded by depositors. Should the banks declare bankruptcy, account holders will be covered for up to 500,000 yuan under the PRC’s deposit insurance scheme. Account holders with deposits in excess of 500,000 yuan could receive additional compensation in proportion to the funds remaining (if there are any) after the bank goes through bankruptcy and liquidation proceedings. Depositors of troubled banks are unlikely to be adequately compensated; for comparison, the deposit insurance fund established by the CCP authorities after the takeover of Baoshang Bank (officially filed for bankruptcy in 2020) in May 2019 contained just 10 billion yuan.
The CCP authorities could end up treating only cases involving the purchase of deposit products through third-party fintech platforms as fraudulent or illegal fundraising and avoid the liability of stepping in to bail out the banks. Doing so, however, would destroy the credibility of small- and medium-sized banks in the country, and would likely lead to large-scale bank runs. Chinese netizens have already posted pictures of long queues outside banks in Henan, Shanghai, and Dandong City in Liaoning Province.
2. What the CCP authorities have publicly disclosed about financial risk and financial sector anti-corruption purges suggests that problems with troubled rural banks are likely just the tip of the iceberg.
As we noted in the June 16 edition of this newsletter, the People’s Bank of China noted in its 2021 financial stability report that 89 banks, of which 84 are small- and medium-sized banks, had taken in 550 billion yuan in deposits through third-party fintech platforms. Nearly half of the 550 billion yuan are held in banks that the central bank classified as “high-risk.”
On May 13, the China Banking and Insurance Regulatory Commission announced that it had taken action against the leading cadres (一把手) of 63 small- and medium-sized banks in Liaoning Province since 2021. The regulator also noted that Liaoning is where the most number of small- and medium-sized banks executives were purged this year, and that Liaoning is a “major financial risk” area.
The Xi leadership’s intensification of efforts to combat corruption in the financial sector and measures to crack down on the “disorderly expansion of capital” at this time hint at the CCP regime’s immense financial risks. Power consolidation and factional struggle matters aside, Xi Jinping previously moved carefully and slowly in rectifying the financial sector to avoid shaking things up too much and triggering unnecessary financial and political trouble. The “eagerness” with which Beijing is now moving to tackle financial sector problems suggests that Xi has no choice but to “bite on bone” and take unpopular action to fix the dire financial situation so as to preserve regime security.
3. Progress in the Alvin Chau case suggests that the Xi leadership has extracted what they wanted from him during the investigation and can now hand him over to the prosecutors for criminal trial.
Chau, like Tomorrow Group’s Xiao Jianhua, is linked with the Jiang Zemin faction and the Zeng Qinghong clan. News that both men are going on trial soon was likely leaked to intimidate Xi’s factional rivals and would-be challengers in the Party elite ahead of important political conclaves (Beidaihe, 20th Party Congress, etc.). Xi could also be simultaneous indicating that he will be merciful to the elites and their associates, by not acting on the dirt provided by Xiao and Chau to make more arrests, as long as they do not block his 20th Party Congress political agenda (take a third term, appoint allies to key positions, etc.).
Whether or not Xi uses the political “ammunition” gotten from Chau and Xiao to go after the Zeng clan, the Jiang faction, and other Party elites depends on political necessity. If those individuals and factions do not attempt to undermine the Xi leadership and support his political agenda, Xi will likely spare them and limit the purge of “big tigers.” On the flip side, efforts by rival factions to push back against the Xi leadership that seriously endanger regime security could force Xi to “show his hand” and move against the senior ranks of the Jiang faction.
SinoInsight 2
Property sector matters
May 13
The Xuejiadao Sub-district office in the West Coast New District of Qingdao City issued a notice on the subject of encouraging residents to purchase new commercial housing (關於做好促進居民購買新建商品房的通知). The notice directed the sub-district office to “mobilize residents in the jurisdiction” to buy new commercial housing and organize groups to purchase commercial housing. Each sub-district cooperative must complete online registration for at least two houses by the end of June, and this assignment will be included in the 2022 annual work assessment for officials.
June 18
1. Chinese property developer Greenland Holding’s Zijin Center project in Nanjing recently launched a “buy one, get one free” campaign with two plans, according to mainland media reports. The first plan gives away up to 10 apartments (27 square meter floor area) in Greenland’s Yundu project in Nanjing’s Qixia District to buyers of hotel-type apartments in the Zijin Center project. The second plan gives to buyers of designated office units in the Zijin Center project an apartment of about 45 square meters in floor area (worth 2 million yuan) in the same project.
Greenland’s Zijin Center is a mixed-use project located on Hunan Road in Nanjing’s Gulou District. Hunan Road was once referred to as Nanjing’s “second commercial circle.” The project commenced in December 2019, but only sold 319 of 1,023 units for a transaction ratio of 30.72 percent.
Prices of new houses in Nanjing fell in both April and May, while the prices of second-hand houses in Nanjing dropped for five straight months this year, according to data from the National Bureau of Statistics.
2. Chinese property developer Poly Group’s Shuimu Fanghua project in Jiangsu’s Haizhou District offered a series of offers from June 18 to June 19, including giving home buyers a 200-cattie (about 265 pounds) pig and 10,000 yuan marketing bonuses to property agents who complete sales.
June 20
1. The Zhengzhou local government launched a “house voucher resettlement” (房票安置) policy as part of its shantytown redevelopment project. The policy gave people being resettled from shantytowns marked for demolition the choice of receiving compensation in the form of vouchers that can only be used to purchase houses instead of cash. To encourage people to take up the house vouchers, the Zhengzhou government increased the resettlement compensation amount by 8 percent and gave resettlers three months of cash to tide them through their housing transition.
According to the latest data from the National Bureau of Statistics, the price of new homes in Zhengzhou has been falling for 10 straight months (August 2021 to May 2022). To help developers offload inventory, the Zhengzhou authorities pushed local commercial banks to implement a first-home loan interest rate lower limit of 4.25 percent and reduce the down payment ratio for second-home buyers to 40 percent.
Mainland media Yicai Global reported that 15 cities in China have successfully implemented or announced “house voucher resettlement” policies since March this year. These cities include Xinyang, Yibin, Changshu, Jiangyin, Wenzhou, Nanjing’s Lishui District, and Zhengzhou.
This is not the first time that local governments have rolled out “house voucher resettlement” policies to promote property sales. In 2015, some cities introduced such vouchers as part of their demolition and resettlement of shantytowns. Many cities subsequently adopted the policy in 2016 to help developers clear their inventory. The “house voucher resettlement” policy was gradually abandoned in 2018 following the “monetization” of shantytown resettlement projects.
2. China Evergrande, Evergrande Property, and Evergrande New Energy Auto announced guidelines for the resumption of trading.
China Evergrande said that it is “actively pushing forward with its restructuring work” and expects to announce a preliminary plan by the end of July. The company also said that the independent probe of Evergrande Property over pledged deposits is still underway and the expected time of completion of the investigation cannot yet be determined at this stage.
June 21
Henan-based Central China Real Estate launched a “swap wheat for house” deal to attract buyers from June 20 to July 10, according to mainland media. In advertisements, the property developer said that buyers can use wheat, priced at 2 yuan per catty, to offset up to 160,000 yuan of down payment for one of its developments in Henan’s Minquan County.
Central China Real Estate also advertised that buyers can make down payments in garlic at 5 yuan per catty for property developments in Henan’s Qixian County. Advertisements for swapping garlic for homes started to appear on major Chinese social media platforms in late May. A Central China Real Estate salesperson told mainland media that garlic can only be used to make down payments, with the upper limit set at 20,000 catties of garlic for 100,000 yuan.
At the time of writing, the wholesale price for both garlic and wheat is 1.5 yuan per catty.
Analysis: The “swap wheat for house” deal seems somewhat ridiculous at first glance, but it serves the purpose of making it easier to offload inventory and generate funds for the property developer. Central China Real Estate will likely cooperate with wheat and garlic buyers in an effort to get farmers to swap their crops at above market prices for houses, then resell the crop at slightly below market price to those buyers. This is equivalent to a stealth price cut.
OUR TAKE
1. Property sales in China improved slightly after the CCP authorities rolled out a series of relaxed property sector restrictions, but remained weak on the whole.
According to data by mainland property information service provider CRIC, the top 100 Chinese real estate companies’ cumulative sales volume in the first five months of 2022 was down 52.3 percent from the same period in 2021, while property sales in May fell 59.4 percent from a year ago.
Poor property sales have in turn affected land development. CRIC noted that developers have yet to start construction on 79 percent of the land they acquired in 2021. This sharply contrasted with the rapid real estate development of the past; developers focused on high turnover rates sometimes begin construction on the same day that they acquire land.
Figures from the National Bureau of Statistics also reflect weak sales. Sales of commercial housing from January to May 2022 fell 31.5 percent to 4.8337 trillion yuan; of the total, sales of residential buildings declined 34.5 percent to 4.2317 trillion yuan. Commercial housing sales in May showed improvement from April, increasing 29.7 percent from a month ago to 1.0548 trillion yuan; residential building sales were up 26.4 percent month-on-month to 906.9 billion yuan. However, sales of commercial housing and residential buildings in May decreased by 37.7 percent and 41.7 percent year-on-year, respectively.
In May, prices of new houses fell in 43 of the benchmark 70 medium- and large-sized cities, or three fewer from a month ago. Meanwhile, prices of second-hand houses fell in 53 cities, or three more than the previous month. This shows that housing prices in popular cities have somewhat rebounded, but overall sales prices are still weak.
Table 1 (Source: National Bureau of Statistics)
2. Property developers offering all sorts of deals to sell units suggest that they are tight on funds and need to clear inventory to get cash fast as the second peak of debt repayment period approaches this year.
Meanwhile, local governments are pushing policies to improve property sales because they have long been reliant on land sales to generate revenue. The return of the “house voucher resettlement” policy and efforts in Zhengzhou City and elsewhere to get residents to buy houses suggest that local governments are struggling financially and are desperate to prop up the property market.
For instance, those affected by shantytown redevelopment in Zhengzhou will likely choose the housing vouchers over cash because the former provides better compensation. Residents who opt for the vouchers could also be inclined to take out loans to buy bigger and better houses, which helps property developers and ultimately the Zhengzhou government. Issuing vouchers also allows the local government to carry out land acquisition and demolition even if it lacks funds to compensate the residents. Finally, the local government can use tax credits to offset some of the housing voucher payments to real estate companies.
The Xuejiadao sub-district’s move to tie promoting house sales with official performance seems excessive. Even more exaggerated is the attempt to “give jobs” to people who purchase houses in Guangxi’s Rendong Town. As part of a series of property sales promotion policies, the Rendong local government pledged to recommend at least three jobs that offer salaries not lower than the minimum wage in Yulin City, where Rendong, is located to new residents who have bought homes in the town but are unemployed. Put another way, the Rendong government is probably so desperate for land revenue that it is willing to find jobs for unemployed residents so that they can finance their property purchases.
In the PRC, “the top has policies, but the bottom has countermeasures” (上有政策, 下有對策). CCP officials looking to hit performance targets could go overboard in implementing policies to promote property sales, creating an illusory “real estate boom” in some areas. This will in turn make it much harder for the central government to formulate effective policy to address the property sector crisis.
3. Data released by CRIC on June 10 shows that China’s real estate companies are short of funds as the peak period for debt repayment approaches.
Total financing of 100 typical housing companies decreased 50.2 percent in May to 51.975 billion yuan, while the monthly financing scale was the third-lowest since 2019. Concurrently, 175.5 billion yuan of real estate onshore and offshore bonds issued by 200 core real estate companies are set to mature during the June-July period. And of those maturing bonds, 117.8 billion yuan (67 percent of the total) were issued by private property developers.
We remain pessimistic about the outlook for China’s property sector. The real estate debt crisis and financial contagion will likely expand further as the U.S. Federal Reserve hikes interest rates and as the world deals with rising inflation and economic recession. Mainland developers will find it increasingly harder to sustain operations, which will in turn impact local government finances and operations.
