SinoInsight 1
On Aug. 8, the Asset Management Association of China (AMAC) released a list of seven Chinese private equity funds that it has “lost contact” with. A fund is considered to be out of contact with AMAC if it did not update its information every three months and AMAC is unable to reach the fund after the three month period.
On the list is Yazhoujuejin Investment Management (Beijing) Co. Ltd., a one-time “fund champion” in China that raised tens of billions by crowdfunding to raise money for stocks. Yazhoujuejin’s actual controller had vanished, and a police investigation was underway.
Another fund on the list is the Shenzhen based Zhong Jing Guo Tou. The fund’s actual controller was another runaway boss, and the fund handled investments of over 1.8 billion yuan.
According to AMAC’s data, it has “lost contact” with 163 private equity funds in the first half of 2018, or a figure equivalent to 70 percent of the funds that were out of contact last year. As of end June, there are 23,903 registered private equity fund managers and 73,854 funds in China handling over 12.6 trillion yuan worth of investments.
OUR TAKE
China’s debt crisis has been triggered, and problems are spreading from the peer-to-peer lending platforms (at least 329 P2P companies have folded) to the private equity funds. P2P failure has thus far affected investors that have parked sums of under a million into the lending platforms. Private equity fund failure would affect an even more affluent slice of the population because the threshold for joining the funds is at least 1 million yuan.
We believe that China’s debt crisis would only grow more severe as the economy worsens and the Sino-U.S. trade war drags on. The possibility of a systemic financial crisis should not be ruled out.
SinoInsight 2
State-run media Xinhua ran a long commentary piece titled “Declaration: Trials and Hardships Can’t Stop the Creation of a Good Life” on Aug. 7. The “Declaration” touted the Chinese Communist Party’s (CCP) “political results” in developing China, and obliquely suggested that America “did not wish to see 1.3 billion people lead a good life” by waging a trade war with China.
The commentary also stressed that CCP rule must be maintained if China is to overcome its difficulties and attain the “rejuvenation dream” and the “good life.”
OUR TAKE
1. The CCP’s “Declaration” indicates that it is feeling the heat from grave threats to its rule.
After the communist system and ideology became bankrupt with the end of the Cultural Revolution, the CCP based its legitimacy on being able to provide economic prosperity for the people and the country. The CCP did manage to make China wealthier (at the cost of a precipitous decline in people’s morality), and resorted to propaganda when it struggled to deliver on the economic front.
The propaganda narrative, however, has since been punctured by the Sino-U.S. trade dispute. In contrasting the state narrative and U.S. statements, the Chinese people are gradually discovering that it was the CCP that was impeding China’s economic development and not playing by international trading rules.
Meanwhile, the moral vacancy in all segments of society China has been exposed this year with incidents like the vaccine scandal; sexual assault and harassment in the education system; P2P failures; and local government defaults.
2. Reporting in Western media note that the “Declaration” is China’s way of showing that it is not “cowed” in the face of U.S. threats. Based on our research and understanding of CCP operations, however, we believe that the “Declaration” is primarily a piece of domestic propaganda to deflect the people’s attention from CCP incompetence and blame China’s economic and social woes on America. We earlier analyzed that the CCP would definitely seek to divert domestic hatred to the U.S. if the trade war breaks out.
Two other signs support our analysis. First, the “Declaration” does not mention America by name, a move designed to avoid antagonizing Washington. Second, the items included in Beijing’s $60 billion tariff list makes it seem more like a “surrender document” than the issue of a challenge (see entry below).
3. The CCP is bound to seek fresh negotiations with the U.S. to de-escalate trade tensions and preserve the stability of its rule. It seems, however, that the CCP has not yet found a good excuse to talk with the Trump administration without losing face.
