1 Beijing extends prior real estate support policy as more signs of deflation emerge
On July 10, the People’s Bank of China and the National Administration of Financial Regulation issued a notice on extending the period of financial support for the “stable and healthy development of the real estate market” (關於延長金融支持房地產市場平穩健康發展有關政策期限的通知). The notice extended until Dec. 31, 2024 the policies on the extension of stock financing for real estate companies and supporting financing for guaranteeing the delivery of (unfinished) buildings as introduced in the 16 financial measures for supporting the real estate market introduced in 2022.
On Nov. 23, 2022, the PBoC and the China Banking and Insurance Regulatory Commission jointly issued a notice containing 16 financial support measures for the real estate sector (關於做好當前金融支持房地產市場平穩健康發展工作的通知). The financial measures aimed to “maintain stable and orderly real estate financing, actively do a good job in financial services for guaranteeing the delivery of buildings, cooperate in the risk disposal of distressed real estate enterprises, and increase financial support for housing leasing.”
In reporting the recent extension of part of the 16 financial support measures, some mainland media outlets billed the move as “favorable” for the property sector and speculated about whether the PRC authorities could roll out stronger policies in the future.
Housing market data
According to data by the China Index Academy:
Sales
In June, the sales performance of the top 100 real estate companies in China fell by 28.1 percent. The single-month performance in June shifted from positive to negative and the scale of performance for the month was lower than that of the same period in 2022.
Financing
In the first half of 2023, the total non-bank financing of real estate enterprises fell 16.2 percent year-on-year to about 404.17 billion yuan. Of the total, credit bonds declined by 7 percent, overseas bonds fell by 34.6 percent, trusts by 69.6 percent, and asset-backed securities by 4.5 percent.
Debt repayment peak
The balance of real estate bonds maturing in July and September 2023 is estimated to exceed 90 billion yuan, and developers will enter a peak period of debt repayment. However, the scale of newly issued bonds will not cover the amount to be repaid; newly issued bonds from January to June 2023 amounted to just 49.2 percent of the maturing debt.
More signs of deflation
On July 10, the National Bureau of Statistics announced that the consumer price index (CPI) in June was unchanged from a year earlier, down from 0.2 percent growth in May and representing five consecutive months of month-on-month decline.
Also, the producer price index (PPI) fell by 5.4 percent in June year-on-year and 0.8 percent month-on-month, or nine consecutive months of month-on-month decline.
Our take
1. The CCP authorities’ recent extension of a previous financial support measure to prop up the real estate sector suggests two things:
First, the 16 financial support measures introduced in November 2022 have had a limited impact in fixing China’s many real estate problems and arresting the decline of the sector after half a year. Regardless, Beijing appears to have decided to give the policies some more time to produce results. Beijing also likely needs to extend real estate developers’ access to financing now so that it can prevent or minimize developers defaulting on their debt and declaring bankruptcy (which would exacerbate the real estate debt crisis) when the peak debt repayment period hits in the third quarter of this year.
Second, Beijing likely does not dare to take stronger stimulus measures, including canceling the “three red lines” restrictions, due to concerns over currency depreciation, capital outflows due to the widening U.S-China interest rate spread, and other economic woes (see point 2). Therefore, the best that the PRC authorities can do at the moment is extend relatively safer real estate support policies while using propaganda to talk up the extension of a “favorable” older policy.
2. The CCP authorities likely did not scrap the “three red lines” or take stronger moves to rescue the real estate sector due to China’s current bleak economic situation. As we analyzed in the July 10 newsletter, China is clearly experiencing deflation and Beijing cannot introduce strong stimulus policies without incurring various economic and financial troubles.
Suspending the debt of property developers or granting them access to funding with delayed repayments, however, are akin to placing band-aids on the real estate sector problem. Worse, such policies worsen the spread of financial contagion as the real estate sector’s debt risks are transferred to the banking sector and the financial system at large. The key to resolving the debt crisis is sales, but few would be willing to invest in devalued property assets under deflationary conditions except for homebuyers who need houses or apartments for immediate needs.
3. The current property sector trends suggest that China’s GDP in the third quarter is likely to dip even lower than market expectations. Of course, the CCP authorities could find ways to bluntly inflate the second quarter GDP figure and economic data to make it seem like the Chinese economy will improve over the long run. The massaged economic figures, however, may prove unconvincing and instead strengthen growing perceptions that the Chinese economy is in steep and irrevocable decline.
Businesses, investors, and governments must be psychologically prepared to see more signs of severe deterioration in the Chinese economy and remain skeptical of official economic and financial data.
2 No change in Sino-US situation after Yellen’s China trip
U.S. Treasury Secretary Janet Yellen visited Beijing from July 6 to July 9. During her trip, she had 10 hours of meetings over two days with senior PRC officials like premier Li Qiang, vice premier He Lifeng, finance minister Liu Kun, People’s Bank of China vice governor Pan Gongsheng (Yellen and U.S. readouts refer to Pan as the PBoC head; he is the bank’s Party secretary and expected to take the governor position), and others.
CCP propaganda
Around the period of Yellen’s Beijing trip, PRC state-run media promoted the benefits of Sino-U.S. cooperation while subtly creating the impression that the Treasury Secretary was “pro-China.”
July 6 and July 7
Yuyuan Tantian, a social media platform affiliated with state broadcaster CCTV, published an article about a rainbow appearing in the sky when Secretary Yellen arrived in Beijing.
The article noted that PRC finance ministry international economic relations department director Yang Yingming and U.S. ambassador to China Nicholas Burns both pointed out the rainbow to Yellen. “With sincerity and mutual respect, Sino-US relations [will improve] just like rainbows after the rain,” the article said. The article also noted that the U.S. and PRC officials “shook hands for nearly 20 seconds.”
In welcoming Yellen on July 7, premier Li Qiang said that the rainbow was “a natural phenomenon … but it also symbolizes Sino-U.S. relations. We not only have wind and rain. After experiencing a round of wind and rain, we will definitely see rainbows.”
Li added, “I also often say to Chinese entrepreneurs that we always have to go through some difficult times. Now we must look at the world economy from a distance, and not just at our feet. Just like on a rainy day, you only see a puddle of mud under your feet, but when you look up and see a rainbow, you can see more rainbows.”
July 7
Mainland media reported that Yellen had dinner at a Yunnan cuisine restaurant in Beijing’s Sanlitun District on her first day of the trip. According to the reports, the restaurant’s owner and other diners discussed Yellen’s meal on Weibo, noting that she was very proficient with chopsticks and liked to eat a type of mushroom called “jianshouqing” (見手青). Mainland media further speculated that Yellen is a “Chinese food lover.”
July 10
The PRC finance ministry published a statement on Yellen’s trip by a “relevant person in charge.” Noteworthy points include:
- The PRC side pointed out in meetings with Yellen that a “healthy and stable Sino-U.S. relationship is not only beneficial to both counties, but also conducive to world peace and development. Mutual respect, peaceful coexistence, and win-win cooperation should be the basic and correct way for countries to get along with each other.”
- The meetings illustrate the “mutually beneficial and win-win nature of Sino-U.S. economic relations.” The PRC believes that strengthening bilateral cooperation is the “practical need and correct choice” for both countries. Also, the U.S. side stated that it does not seek to “decouple” from China. (Explainer: The CCP is hinting that the U.S. has come to “kowtow” to China at this time because America is facing economic and financial crises and needs China’s help.)
- The PRC side requested that the U.S. take “concrete actions to respond to China’s major concerns about U.S. economic sanctions and suppression.” The PRC “reiterated its concerns” on issues such as “canceling additional tariffs, stopping the suppression of Chinese companies, treating two-way investment between the two countries fairly, relaxing export controls on China, and canceling the ban on Xinjiang products.”
- The PRC side clarified its position on “healthy economic competition.” The PRC claims to have been “establishing and continuously improving” its “socialist market economic system” since “reform and opening up,” and is currently “striving to promote a higher level of opening up.” Differences between the two countries “should not be the reason for estrangement, but precisely the impetus for strengthening communication and exchange.” Both sides should “inject stability and positive energy” into the bilateral economic relationship. (Explainer: The CCP is indirectly defending its claim that China is a “developing” country and putting forth the argument that the U.S. should not bully China because China is still catching up to American developed-economy standards.)
- The PRC is willing to cooperate with the U.S. in coping with global challenges. After noting that challenges like climate change, debt issues, and global macroeconomic and financial stability are becoming “increasingly severe,” the PRC added that Xi Jinping had put forth the “Global Development Initiative, the Global Security Initiative, and the Global Civilization Initiative” as part of a plan to deal with global challenges and “build a community with a shared future for mankind.” Also, the PRC also hopes that developed countries, including the U.S., will “shoulder their due responsibilities,” as well as “show understanding and take care of” developing countries. (Explainer: The CCP is implying that China is willing to cooperate with the U.S. on behalf of and for the interests of developing countries, China included, i.e. the CCP is suggesting that it can play the role of peacemaker and promote “multilateralism.”)
US optics
July 8
1. In remarks at a press conference near the end of her trip, Secretary Yellen made the following noteworthy comments:
- Yellen described her conversations with senior PRC officials as “direct, substantive, and productive.”
- “The U.S. and China have significant disagreements … But President Biden and I do not see the relationship between the U.S. and China through the frame of great power conflict. We believe that the world is big enough for both of our countries to thrive.”
- “My objective during this trip has been to establish and deepen relationships with the new economic leadership team in place in Beijing. Our discussions are part of a broader concerted effort to stabilize the relationship, reduce the risk of misunderstanding, and discuss areas of cooperation.”
- “I noted that China’s growth has lifted hundreds of millions out of poverty and made clear that the United States is not seeking to decouple from China. There is an important distinction between decoupling, on the one hand, and on the other hand, diversifying critical supply chains or taking targeted national security actions.”
- Yellen expressed concerns about the PRC’s “recent uptick in coercive actions against American firms.”
- Yellen believed that a “shift toward a more market-oriented system in China would not only be in the interests of the U.S. and other countries. It would be better for the Chinese economy as well.”
- “The U.S. will continue to take targeted actions that are necessary to protect our national security interests and those of our allies … Importantly, these actions are motivated by straightforward national security considerations. They are not used by us to gain economic advantage.”
- Yellen said that “it is essential that Chinese firms avoid providing Russia with material support or assistance with sanctions evasion.”
- Yellen said that both sides discussed areas that they could work together on global challenges and exchanged views on macroeconomic and financial developments in both countries.
2. A video of Yellen bowing at least three times when she shook hands with PRC vice premier He Lifeng made the rounds on social media and was widely criticized by Western observers.
Jerome A. Cohen, an emeritus professor at NYU and Chinese law expert, told the New York Post, “Bowing is not part of the accepted protocol.”
Bradley Blakeman, a senior staffer in President George W. Bush’s administration, told the Post, “Never, ever, ever. An American official does not bow. It looks like she’s been summoned to the principal’s office, and that’s exactly the optics the Chinese love.”
July 9
1. Yellen told CBS that one of the purposes of her China trip was to “make sure that we don’t engage in a series of unintended escalatory actions that will be harmful to our overall economic relationship with one another.”
When asked about the PRC announcing export controls on the chip-making metals gallium and germanium, Yellen said, “Our own actions are narrowly targeted to address national security concerns, and it’s not clear that the actions that the Chinese took are similarly narrowly targeted at their national security concerns.”
2. U.S. mainstream media framed Yellen’s face-to-face communication with PRC officials in Beijing as a “win” while acknowledging that her trip did not appear to resolve key issues of contention between both countries:
- The New York Times report of Yellen’s trip ran the headline, “China and the U.S., Still Adversaries, Are Talking. That’s a Start.”
- In listing three takeaways about the trip, the Times said, “Conspicuously missing from a news conference Ms. Yellen held on Sunday, and from a separate statement by China’s official news agency, Xinhua, was any suggestion that even one of the many trade, investment and technology issues between the two countries had been resolved.” The Times also noted that Yellen “avoided mentioning de-risking” during her trip and instead said that the U.S. “wanted diverse supply chains — which happens to be a longtime public policy goal of China as well.”
- Politico said, “The major win from Yellen’s visit appeared to be a willingness on the part of both sides to keep talking after years of escalating tensions over trade and security.”
Big picture
Yellen’s China trip comes amid increasing signs of trouble in the Chinese economy despite expectations of a post-COVID rebound, growing global economic weakness, and stalemate in the Russia-Ukraine war.
Our take
1. The official readouts and media reports from the U.S. and the PRC suggest that Secretary Yellen’s Beijing trip yielded no meaningful breakthroughs on contentious issues between both sides or significantly lowered Sino-U.S. tensions.
Both sides noted directly or indirectly that their respective national security was a key concern, which suggests that national security issues would continue to dictate how each side approaches and navigates the bilateral relationship. This affirms our earlier assessment that “heightened Sino-U.S. tensions will be the norm, and not the exception, as long as Beijing and Washington prioritize national security interests above economic benefits.”
Both Washington and Beijing also signaled that neither is keen on raising tensions unnecessarily—at least for the time being—even as they both take measures to shore up national security and safeguard their respective interests.
All in all, Yellen’s trip builds on that of Secretary of State Antony Blinken in creating the impression that the U.S. is keen on reaching a “ceasefire” of sorts with the PRC amid the emergence of a global “polycrisis.” However, the apparent lack of progress on either side in resolving existing differences, as well as future actions by Beijing and Washington to shore up national security, leaves room for sudden escalations of tensions between the two sides depending on future developments.
2. The CCP has shown with its recent actions and propaganda that Beijing is still very wary of “great power competition” with the U.S. and will not deviate in preparing for and acting against what it perceives to be Western efforts at “containing, encircling, and suppressing” China regardless of Yellen’s trip or future visits by other senior U.S. officials.
That said, the CCP has clearly latched on to Yellen’s trip to advance some of its short-term goals and state its position on how it wants the bilateral relationship to develop.
For one, the Xi leadership again expressed willingness to continue doing business with the U.S. and improve relations despite the frostiness in the first half of the year. This is in line with Xi Jinping’s post-20th Party Congress agenda that we anticipated in early October 2022 and was later verified by official statements from the PRC side during the Xi-Biden meeting in Bali in November 2022. As we wrote at the time, the CCP is looking to “de-escalate tensions and improve ties with the U.S.” to “more deeply integrate the PRC with the world to create more opportunities for the Party to survive crises and build itself back for greater dominance.” Signs of rapid deterioration in the Chinese economy in the first half of 2023 and mounting social problems mean that Beijing has even greater incentive now to at least keep things on an even keel with the U.S. and have one less crisis to cope with.
The Xi leadership also indirectly handed another list of things that the Biden administration should compromise so as to deepen and make more permanent any “thaw” in the bilateral relationship. This is evident from the PRC “reiterating its concerns” on “canceling additional tariffs, stopping the suppression of Chinese companies, treating two-way investment between the two countries fairly, relaxing export controls on China, and canceling the ban on Xinjiang products.” This “list” is similar to the two lists that PRC vice foreign minister Xie Feng passed on to then-U.S. Deputy Secretary of State Wendy Sherman in Tianjin in July 2021, even though PRC state media did not make it seem that demands for concessions were made to Yellen.
3. Similar to the Blinken trip, the optics of Yellen’s China visit are very poor and could potentially undermine the Biden administration’s effort to rally partners and allies in countering the PRC. In particular, Yellen “bowing” to He Lifeng was an obvious faux pas and reinforces the impression of the U.S. taking on the “supplicant” role in the bilateral relationship even though there is no real change in the status quo. Yellen repeating CCP propaganda about having “lifted hundreds of millions out of poverty” is another faux pas, and could see the Party come away with the impression that the U.S. side is eager to “re-engage” with China and will be receptive to the PRC’s demands.
As we previously wrote, “The CCP does not respect weakness and will latch upon openings afforded it by the U.S. to steer the bilateral relationship in a direction that allows it to better survive its many crises and lay the groundwork for regional and global domination.” The Biden administration must pay attention to protocol and optics going forward if it is serious about countering the PRC and rallying allies and partners around that endeavor. Otherwise, the CCP’s propaganda and influence operations will see greater success, and the regime will gain an advantage in winning over countries that increasingly come to believe that the U.S. is unreliable or uncommitted to its own policies.
