SinoInsight 1
On July 17, the local government in Kaifeng, Henan Province, scrapped its three-year limit on the sale of new homes and did away with the buying qualification freeze period for homebuyers who previously canceled a property transaction. In May 2017, the Kaifeng local government’s strict property restriction regulations were billed as “the most restrictive sales regulations” in China.
Meanwhile, at least 234 property development companies have filed for bankruptcy this year as of July 21, according to the People’s Court Announcement records.
OUR TAKE
1. The latest property sector information reinforces our analysis that China faces growing property bubble risks.
We have been warning about China’s property sector risks in several editions of this newsletter:
- In the June 13 newsletter, we wrote about China Banking and Insurance Regulatory Commission head Guo Shuqing’s remarks at the 11th Lujiazui Forum in Shanghai that “history has proven that there is a price to pay for over-dependence on property.”
- In the June 20 newsletter, we noted that at least 20 real estate projects (including formal disclosure and pre-disclosure) underwent transfers of equity between May 1 to June 14.
- In the July 18 newsletter, we wrote that a spokesperson from the China Banking and Insurance Regulatory Commission warned about property trust assets growing too rapidly and too much. Also, the PRC’s National Development and Reform Commission released “relevant requirements” for the property industry which restricts Chinese property companies to issuing foreign debt to replace the medium and long-term foreign debts that are due to expire within the year.
2. Several signs have emerged this year which indicate that China’s property sector faces tremendous risks, including the high debt ratio of property enterprises and the high risk of broken capital chains for developers. We believe that the PRC government is likely most concerned about the real estate investments of Chinese banks, state-owned enterprises, P2P lending platforms, and financial institutions that sell wealth management products. All of the financial institutions mentioned will be hit badly should the property bubble bursts, and their losses will severely impact the economy. Thus, the central authorities are being forced to implement precautionary measures now to prevent the property bubble from blowing up.
3. Per the CCP’s authoritarian characteristics, Chinese officials will “prefer left rather than right” when it comes to implementing policies from the central authorities. For the financial sector, that means an expansion of risks and their potential triggering. To cite an example, when the CCP sought to clean up the P2P sector in 2018, the overzealous and “left-leaning” manner in which local governments tackled the problem led to the collapse of some financial companies with normal operations and followed regulations.
In another example, the Beijing Municipal Housing and Urban-Rural Development Commission conducted a surprise inspection of the sales transactions of three property projects between July 15 to July 17, according to mainland media. This inspection could trigger a bigger crisis.
We believe that China’s property bubble risks are very high. Should the United States impose additional tariffs, China’s economy will deteriorate more rapidly and the property bubble is in real danger of bursting. China’s property sector risks will also inevitably affect the banking system.
SinoInsight 2
On July 20, Caixin reported that Zhong Xiaolong, the head of the Shandong provincial branch of the China Development Bank, had committed suicide. According to the report, Zhong had slashed his wrists and stabbed himself in the chest when he was in Beijing on July 17. Caixin noted that “the situation was tragic and it is unclear if there were ulterior motives.”
The Caixin report speculated that Zhong could have committed suicide over a corruption incident. When Zhong was vice president of the China Development Bank branch in Jilin, the branch made a guarantees violation that involved losses of over 3 billion yuan and the charge of using one’s position for profit.
The China Development Bank is a policy-oriented financial institution that comes directly under the leadership of the State Council. The CDB manages the nation’s funds, is China’s largest bond bank, and is China’s largest foreign investment and financing cooperative bank. The CDB once issued a loan of 100 billion yuan to the Chongqing government when Bo Xilai was running the city. A good part of Huawei’s controversial overseas expansion efforts and low-cost competition is also financed by the CDB.
OUR TAKE
1. We believe that the possibility that Zhong Xiaolong’s death was not the result of suicide cannot be ruled out. This is because Zhong was involved in massive corruption. The corruption factor and the fact that he was found stabbed in the chest leaves open the possibility of a murder attempt.
If Zhong really did commit suicide, he could be looking to protect his family members from being caught up in a corruption case.
2. It is an open secret that the CCP officialdom is very corrupt. In this environment, it is easy for top financial executives to engage in massive corruption.
Zhong Xiaolong’s death hints at a “black hole” in China’s financial system where money has disappeared into the pockets of top financial executives. As China’s economy continues to worsen and debt problems become more severe, the long-accumulated problems in the financial sector are looking ready to erupt.
We believe that the surfacing of massive corruption problems in China’s banking system is a leading indicator of a coming financial crisis. The corruption problem magnifies China’s property sector problems and heightens financial risks.
