Why China Has a Giant Pile of Debt; Exclusive: What Policies Can Revive China's Real Estate Market?
Chinese Automaker Body Retracts Two-Day-Old Price Pledge; Yellen stresses 'fair' rules, communication in Beijing meetings
Welcome to this issue of The China Brief. Today is July 08, 2023. Here at The China Brief, we bring you the latest news on China's politics, economy, and society from global media sources, along with exclusive expert analysis. If you find our content helpful, please subscribe to our newsletter.
What Policies Can Revive China's Real Estate Market?
As mentioned earlier, the deleveraging of real estate developers and "bubble clearing" are deliberate actions by the Chinese government, and a change in policy will not be taken lightly. So, if due to the reasons mentioned earlier, the policy is pivoted towards stimulation, what kind of policy combination might we see?
In fact, in 2015, due to economic downturn, the Chinese government once stimulated the real estate market, implementing policies including: a) relaxing purchase restrictions (limitations on the number of homes a family can buy); b) significantly reducing bank interest rates, especially mortgage rates, as well as the reserve requirement ratio; c) lowering the down payment ratio for buying a property; d) tacitly approving and encouraging real estate developers subordinate to central government-controlled enterprises (state-owned enterprises) to buy land and build houses directly from local governments.
If there's a future market recovery, it should obviously include the above three policies, in addition to: a) pausing the "deleveraging" of real estate developers, allowing them to borrow to build new houses instead of being preoccupied with repaying old debts; b) the government should communicate thoroughly with the market, explaining the purpose, necessity, and effects of previous "deleveraging", giving the market a clear and stable expectation for future economic growth prospects – this point is indeed the most important.
Recently, the People's Bank of China has made a minor adjustment to the benchmark interest rate, reducing the seven-day repo rate, the medium-term lending facility (MLF) rate, and the loan prime rate (LPR, which is highly correlated with the real estate mortgage loan rate) by 0.1% each. Compared to the policy combination mentioned above, the recent minor adjustment to monetary policy clearly has limited impact and merely implies that China's decision-makers are starting to focus on economic issues.
Why China Has a Giant Pile of Debt
NY Times
China's debt problem has been on the rise as of late. Trillions of dollars are owed by local governments, real estate developers, and their off-books financial affiliates. This makes it more difficult for China to cancel the large debts that are owed by developing countries. The state-controlled banking system in China is hesitant to accept losses on foreign loans while it is facing far greater losses on loans within China. There is limited official data on China's debt situation, but some researchers estimate that overall debt within China has reached 282% of the country's annual economic output. This is a significant increase since the global financial crisis 15 years ago. China's lending to developing countries represents less than 6% of China's annual economic output, but these loans are politically sensitive. As China's economy slows, more local governments and their financing units are unable to pay interest on their debts. The lack of money to pay for public services, health care, and pensions is having a ripple effect on these regions.
Chinese Automaker Body Retracts Two-Day-Old Price Pledge
Bloomberg
The China Association of Automobile Manufacturers (CAAM) has retracted a pledge made by 16 automakers not to engage in "abnormal pricing practices" in the country's electric vehicle (EV) market. The CAAM said that the reference to pricing in the pledge was inappropriate and violated China's anti-trust law. The retraction comes after the clause drew widespread attention. The association is now urging companies to strictly follow anti-trust laws and rules that encourage independent pricing and fair competition. Tesla was the only foreign brand among the automakers that took part in the signing ceremony.
Yellen stresses 'fair' rules, communication in Beijing meetings
Reuters
US Treasury Secretary Janet Yellen has said that the US and China must compete fairly and communicate closely to avoid misunderstandings. Yellen made the comments during her visit to Beijing, where she met with Vice Premier He Lifeng. She emphasised the need for the two countries to continue talking about areas of common interest as well as disagreements. Yellen also stressed that the US is not seeking economic advantage over China, but rather wants to ensure fair competition with a "fair set of rules" that benefit both countries.
Yellen urges US and China to cooperate on climate financing
Deutsche Welle
US Treasury Secretary Janet Yellen has called for greater cooperation on climate financing between the US and China. Yellen, who was on a four-day visit to Beijing, called on both nations to work together in combating the "existential threat" posed by climate change. She urged China to support existing multilateral climate institutions like the Green Climate Fund and the Climate Investment Funds, and invited China to join the US in contributing to the fund replenishment of the Green Climate Fund in September, with the US committing an additional $1bn. Cooperation between the US and China is considered vital to international efforts to mitigate the worst impacts of climate change.
Keeping up pressure, China sends warships and fighter jets near Taiwan during Yellen’s Beijing visit
The Toronto Star
China's People's Liberation Army (PLA) has sent 13 aircraft and 6 vessels into airspace and waters around Taiwan in the past 24 hours, coinciding with US Treasury Secretary Janet Yellen's visit to Beijing to mend strained relations. Taiwan's Defense Ministry said it is monitoring the situation and that land-based missile systems were prepared to respond. China claims Taiwan as its own territory and sends air and naval missions on a daily basis to intimidate the island. The US's support for Taiwan remains a major point of contention in its relations with Beijing.
One Reason the U.S. Can’t Quit China? Chips.
NY Times
US and Chinese semiconductor companies are being forced to navigate a growing rift between the two superpowers. Officials in Washington claim that US-made chips have been used in Chinese military and surveillance programmes and have enacted restrictions on the export of chips and chip-making equipment to China. Beijing has retaliated by imposing restrictions on foreign firms and limiting the export of minerals used in chip making. China accounts for a third of global semiconductor sales, and for some chipmakers, it represents up to 70% of their revenue.
China Regulator Pushes Mutual Funds to Lower Fees
Bloomberg
The China Securities Regulatory Commission (CSRC) has announced plans to reform the mutual fund industry's fee mechanisms and push for lower fees. The regulator aims to "optimize" mutual funds' fee models and "steadily lower" the industry's overall fee level to ensure it is more aligned with investors' interests. The reform plan was formulated based on the industry's conditions and investor needs. The CSRC did not provide further details on the specific changes that will be made.
Ant's share buyback values firm at steep 70% discount to IPO
Nikkei Asia
Ant Group has unveiled a share buyback plan valued at CNY567.1bn ($78.5bn), down from $315bn when it tried to list in 2020. The move is seen as a means for investors to exit after a regulatory overhaul of the fintech giant. The news came a day after Ant was fined CNY7.1bn to end a regulatory shake-up of the company and to mark a key step in concluding a crackdown on China's internet sector. The buyback price is higher than valuations made by many institutions internally, which could tempt some to participate, said Hanyang Wang, an analyst at 86Research.
Yellen Says US, China Must Address Economic Concerns ‘Directly’
Bloomberg
US Treasury Secretary Janet Yellen has said that the US and China should communicate directly on specific economic concerns, as she reiterated the need for improved exchanges between the two sides. Yellen argued that China and the US can make better decisions to strengthen their respective economies if they closely communicate and exchange views on various challenges. Despite increasingly adversarial relations between the two countries, Yellen has often argued that the world’s two largest economies have a duty to cooperate on major global challenges including environmental issues and debt distress in poorer nations.
China touts next-stage AI development at Shanghai exhibition
Nikkei Asia
China showcased its ambition to develop humanoid robots and artificial general intelligence (AGI) at the 2023 World Artificial Intelligence Conference (WAIC) in Shanghai. Chinese companies dominated the event, with Baidu unveiling its latest AI language model and Fourier Intelligence introducing a humanoid robot. China has become the world leader in the annual installation of industrial robots, with 2021 installations exceeding 268,000 units. However, geopolitical tensions with the US and its allies have impacted the participation of foreign exhibitors and executives at the conference.
China ends tech crackdown with fines on Tencent and Ant Group
Japan Times
The People's Bank of China has imposed fines of over $1bn on Ant Group and Tencent, indicating an end to the government's crackdown on the tech sector. Ant was fined $984m and Tencent $410m for violating laws and regulations in areas including financial consumer protection, payment and settlement business and anti-money laundering obligations. The fines are seen as a positive outcome for the companies, as they indicate that the scrutiny of the sector may be over. Ant's planned IPO in 2020 was cancelled due to the crackdown and these fines could pave the way for the company to eventually revive growth and resurrect IPO plans. Alibaba, which owns a stake in Ant, saw its shares rise 8% following the announcement.
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