According to Chinese Epoch Times, China’s economy has been in more crisis than expected. The real estate industry is in free fall, and the debt crisis caused by real estate giant Evergrande are problems the CCP faces.
The Chinese Communist Party (CCP) recently issued $4 billion in government bonds to try and solve the problem.
According to China Bureau of Statistics data on Oct. 18, China’s economy contracted more than expected. As a result, the GDP growth rate in the third quarter dropped sharply compared to the same period last year, to 4.9%.
From a production perspective, due to the impact of power cuts, the growth rate of industrial production dropped sharply, from 5.3% in August to 3.1% in September. From the perspective of consumption, The average retail growth of consumer goods in the first three quarters of the year was only 3.9%, significantly lower than the growth rate of the same period in previous years.
The most prominent bright spot in the first three quarters of the year was exports, with a growth rate of 22.7%. However, in September, the export growth rate slowed down to 19.9%.
In September, the indexes of real estate investment and development, newly started projects, investment capital, and sales of real estate products did not show positive signs. New real estate projects started in September fell 13.5% year-on-year, the sixth consecutive month of decline and the most extended continuous decline since 2015.
At the same time, housing prices are cooling down at an accelerating rate. In September, the cost of newly built commercial housing in 70 cities in China fell for the first time since May 2015. In addition, the number of cities where the price of old houses fell more than doubled in the three previous months.
In the third quarter, the real estate sector’s GDP fell 1.6% year-on-year, the first decline since the first quarter of last year.
Due to the slowdown in real estate activity, weak domestic consumption and investment demand, and a lack of coal and electricity, especially the risk of slow policy adjustment, many analysts have forecast China’s economic growth will decline in the future.
Several Chinese banks and financial regulators have recently expressed their views on the real estate industry and Evergrande’s debt crisis.
At a press conference on Oct. 15, the Central Bank of China said that some financial institutions had misunderstood the financial management rules for real estate businesses.
Immediately after the central bank’s explanation, some suggested that the real estate industry regulations could be reversed. However, after verifying with the bank, the source of the Epoch Times information said that the credit line might not be “full liberalization” but not violate the red line. And for real estate companies that can control financial risks and control financial leverage well, banks need to lend as usual. In other words, the current practice is only for “correction.”
On Oct. 21, the China Banking and Insurance Regulatory Commission emphasized that it is necessary to ensure the credit needs of people who need capital but “do not speculate in real estate” and stabilize housing prices. Loan assistance for first-time homebuyers. The measures indicate that real estate policy will remain unchanged, but some specific criteria will be relaxed.
Responding to the Evergrande issue, the Central Bank of the Communist Party of China on Oct. 15 stated that Evergrande is a unique phenomenon in the real estate industry and will not pose systemic risks. On Oct. 17, Yi Gang, governor of the Central Bank of the Communist Party of China, also expressed a similar view.
Their reasoning was that of the total liabilities of the Evergrande Group, financial penalties account for less than a third. Creditors are also relatively dispersed, and individual financial institutions are less risky.
In addition, the Central Bank of the Communist Party of China attributed the risk of Evergrande’s outbreak to poor management and blindly expanding diversification in recent years. As a result, it caused financial and operational indicators to drop severely. Currently, relevant departments and local authorities urge Evergrande Group to strengthen asset handling and accelerate project construction resumption.
Yi Gang also mentioned that the central bank’s principal, when responding to the Evergrande incident, strictly follows the order of compensation as prescribed by law. Protect the legitimate interests of creditors and owners’ property ownership, primarily protect the interests of consumers who have bought a home.
Therefore, we can see from these statements that the CCP believes that Evergrande’s crisis is “self-blame.” So as long as it can prevent systemic risks, the CCP has no intention of solving it to save Evergrande. Furthermore, Yi Gang also mentioned the “order of compensation.” It also shows that the CCP is indeed mentally prepared for the bankruptcy and reorganization of Evergrande. Therefore, this information assessment is quite unfavorable for Evergrande.
As a result, on the evening of Oct. 20, Evergrande announced it was canceling its plan to sell part of its equity for $2.6 billion. The initial “money to save lives” was therefore lacking. In addition, according to sources cited by Reuters, Evergrande’s original plan was to sell a 50.1% stake in its profitable subsidiary Evergrande Property. Still, it failed to receive approval from the Guangdong Provincial Government. In addition, some international creditors also objected to Evergrande’s sale of assets.
Previously, Evergrande was preparing to sell the Evergrande Center in Hong Kong for $1.7 billion. In the end, the deal was canceled because Yuexiu Real Estate pulled out of the acquisition. Reuters reported that Yuexiu, a state-owned enterprise, also received instructions from the Guangzhou city government to stop its acquisition by the end of August.
Therefore, according to Bloomberg analysis, the crux of Evergrande’s debt problem now lies in whether Chinese state-owned enterprises are willing to accept Evergrande’s assets. Insiders say that the current situation is not very optimistic.
China lacks the money to issue sovereign dollar bonds, and Wall Street continues to change blood.
Everyone knows that the CCP is currently in crisis. Not only do real estate companies face the risk of default, but private debt and local government debt are also precarious. Moreover, the international environment is also deteriorating. So the CCP has to spend money preparing to expand its army and prepare for war. But where does the money come from? Moreover, foreign exchange reserves are also decreasing. At the end of September, foreign exchange reserves fell for two consecutive months, and the one-month decline also hit the highest level since March.
Therefore, in addition to promoting “common prosperity” at home, the CCP must now cut back on “foreign leaks.”
Recently, the CCP raised $4 billion by issuing U.S. dollar sovereign bonds, including $1 billion each with 3-year and 10-year maturities. $1.5 billion for 5-year bonds and $500 million for 30-year bonds. Reuters reported that, despite China’s economic growth slowing, international investors remained enthusiastic. The data shows that the size of investors’ subscriptions to buy four bonds reached $23.2 billion, nearly six times the amount raised. The Chinese Ministry of Finance is likely to issue a batch of euro-denominated bonds before the end of the year.
The transaction is classified as Reg S and 144A bonds. Reg S bonds may not be issued, sold, or delivered in the United States. In contrast, the 144A bond is a privacy bond for U.S. investors. The Ministry of Finance of the CCP has hired 14 banks responsible for selling bonds, including the central U.S. and European investment banks and Chinese state-owned banks such as the Bank of China, Bank of America, Citigroup, China Construction Bank, Deutsche Bank, and Goldman Sachs.
So, who buys these bonds? The Wall Street Journal reported that Asian investors purchased the majority of 3-year, 5-year, and 10-year bonds, and 30-year bonds are most popular with investors outside of Asia. Of those, U.S. investors bought 23% of these 30-year bonds, and investors from Europe, the Middle East, and Africa bought 53%.
Bond investors say China’s GDP growth is slowing. With power shortages, supply chain disruptions, and a real estate crisis. But they are still not worried about China’s credibility.
Wall Street firms also believe that China is too big to be ignored. And its stock market value is too low to be ignored also. Therefore, they pay more attention to the money-making opportunities that the CCP offers.
In December last year, Goldman Sachs became the first foreign bank to seek out a wholly Chinese-owned securities business. In June of this year, wealth management giant BlackRock became the first foreign company fully approved to sell public fund products to Chinese retail investors. It quickly raised about $1 billion.
In this regard, international financial magnate George Soros has twice criticized BlackRock, calling it a “tragic mistake” to invest billions of dollars in China. First, this can cause losses to BlackRock customers. Second, and more importantly, it would harm the national security interests of the United States and other democracies. Because today “the United States and China are in a vital relationship between two systems of governance of autocracy and democracy.”
Soros was not wrong to say this. Over the past few decades, through collaboration with Wall Street, the CCP has proliferated. Therefore, Zhai Dongsheng mentioned why the CCP was able to control the United States in the past few decades. That’s because the CCP has old friends on Wall Street, the core circle of power in America.
Wall Street is likely to continue to reap huge profits in China, but such gains are dangerous. To survive, the CCP will spare no resources, private, state, or foreign capital. When the financial resources dry up, it will be Wall Street’s turn to be cut “garlic.”
As some commentators have said, after the CCP established power in 1949, it confiscated all private and foreign property. In addition, it refused to pay all foreign debts of the previous administration. Thus, although history has passed, the CCP has remained unchanged over the past few decades. Therefore, history will repeat itself, and Wall Street should also learn from history.