BEIJING: Shares in Chinese property giant Country Garden plunged on Monday (Aug 14) after it missed bond payments and warned of billions of dollars in losses, deepening fears about the country’s heavily indebted real estate sector. Like its troubled competitor Evergrande, any collapse of Country Garden would have catastrophic repercussionsContinue Reading
The Move Forward and Thai Sang Thai parties have slammed the caretaker government under Prime Minister Prayut Chan-o-cha for issuing a new regulation setting income limits for people receiving old-age pensions.
The new regulation was signed by caretaker Interior Minister Anupong Paojinda and published in the Royal Gazette and is effective from Aug 12.
The old regulation was for local administrations to pay universal monthly allowances of 600-1,000 baht to all elderly people – 600 baht for people aged 60-69, 700 baht for people aged 70-79, 800 baht for people aged 80-89, and 1,000 baht for people aged 90 years or more.
Item 6 (4) of the new regulation states that only people with no income, or insufficient income to cover the cost of living, are entitled to the monthly age allowance from the state.
However, Item 17, a provisional clause of the new regulation, states that the new criterion for payment of the age pension does not apply to people who registered for the allowance with their local administration before Aug 12, 2023. This means those currently receiving the allowance are not affected.
Wiroj Lakkhanaadisorn, a Move Forward list MP, said the new criterion had replaced universal coverage for the elderly.
It would have a severe impact on people reaching 60 years-old in the future. People turning 70, 80 or 90 and looking forward to the larger allowance would also be wondering if they would get it or not and, if so, when.
In addition, it was not clear if pople turning 60 who under the new criterion were not entitled to the allowance, but later find they cannot make ends meet, would be able to register for and receive the allowance, and how.
Mr Wiroj said Thailand now had about 11 million people aged 60 years or more. If payment of the age allowance was based on the database for state welfare cards, only 5 million of them would be entitled to the age allowance. The other 6 million would be left out in the cold by the government.
The MFP MP said Section 11 (11) of the Elderly People Act stipulates that payment of the old age allowance must be made on a monthly basis and must be universal and fair. The requirement for the elderly to prove their poverty may prevent them receiving state welfare, which was in breach of this law.
He said people affected by this change could petition the Administrative Court.
Khunying Sudarat Keyuraphan, leader of the Thai Sang Thai Party, said she strongly opposed the new Interior Ministry regulation.
The new criterion for receipt of the monthly allowance for the aged was a serious violation of the principle of universal coverage for state welfare, and it was discriminatory.
It ias not fair that elderly people should have to prove they do not have enough money to cover the cost of living in order to get the allowance, she said.
“The government … should instead lay a foundation for state welfare for all. The government should not use the state budget to create a debt of gratitude or to divide the people into the rich and the poor,” Khunying Sudarat said.
The Move Forward and Thai Sang Thai parties both propounded policies of paying a montly allowance of 3,000 baht to all elderly citizens during campaigning for the May 14 general election.
SYDNEY: Asian shares struggled on Monday (Aug 14) ahead of China data that is likely to amplify the case for serious stimulus even as Beijing seems deaf to the calls, while rising Treasury yields lifted the dollar to a 2023 peak on the embattled yen. Geopolitics was an added worryContinue Reading
Meanwhile, easy access to credit due to fintech advancements also presents its own challenges, potentially hindering Gen Alpha’s ability to learn saving habits and avoid debt.
And of course, this generation faces unique economic uncertainty. A looming global recession, inflation, the COVID-19 pandemic and technology disruptions in the workplace all make it harder for them to plan for their financial future and understand the importance of financial resilience.
Home to 60 per cent of the world’s youth population, Asia has an undeniable imperative to get financial literacy education right. The stakes could not be higher.
Many people lack basic knowledge of financial concepts such as budgeting, saving, and investing. According to a 2015 survey by Standard & Poor’s Ratings Services, two-thirds of adults worldwide are not financially literate. The study, involving more than 150,000 adults, gauged their understanding of financial concepts such as inflation, interest rates, and risk diversification.
This is intrinsically tied to the scarcity of financial education in schools, compounded by a dearth of resources and qualified educators to impart financial knowledge and skills.
Also, in the fast-growing Southeast Asian markets, demonstrating social status through conspicuous consumption is highly valued, particularly for the emerging middle classes. The pursuit of luxury items or extravagant experiences, driven by a quest for social validation, can jeopardise prudent long-term financial planning.
There is also the issue of limited access to financial services. Globally, about 1.4 billion adults do not have bank accounts, impeding their ability to save, invest and manage their money effectively.
The question of where to start educating our young on financial matters reminds me of the line by Desmond Tutu: “There is only one way to eat an elephant, a bite at a time”.
TIANJIN – Watching the giant cranes glide across the longshore of this ancient port, a visitor has to pinch himself to remember that this is not a gigantic toy, but one of the world’s ten largest facilities, moving more than 20 million containers a year from ships to trucks without a single human in sight.
Built in just 19 months in 2020-2021, the automated Tianjin port isn’t just a means to send Chinese exports to the world. A high-definition video on an enormous curved screen in the visitor center reminds the visitor that the most important export item is the port itself. Tianjin was built to be cloned worldwide.
Call it the Sino-forming of world trade: Supply-chain bottlenecks due to port congestion, endemic in the Global South, can be alleviated by this artificial intelligence-driven system that dispatches cranes communicating on a 5G network, and empties a large container ship in just 45 minutes. At the biggest US port at Long Beach, California, unloading the same ship takes between 24 and 48 hours.
Crane operators that used to scrunch up in a booth at the top of their equipment now control the blue behemoths with joysticks from a remote tower, with each worker monitoring several machines. An AI algorithm works out the fastest route from ship to land transport.
This is China’s “Field of Dreams.” Build it, and they will come is the essence of China’s long-term strategy. The “it” in this case includes the world’s largest 5G network, the world’s newest and most efficient infrastructure and a national commitment to apply AI to the so-called Internet of Things, including manufacturing, transportation, logistics, medicine, urban management, and finance.
“They” are China’s private entrepreneurs, who are slow to get past a series of speed bumps: the draconian 2022 Covid lockdowns, the government’s crackdown on Alibaba and other Big Tech companies, and the freeze-up in China’s property market, which is locking up a great deal of private capital.
The Fourth Industrial Revolution is underway in China, although its applications are limited to a few big installations. Some of the productivity gains are remarkable. Near Shenzhen, this writer visited an automated factory where Huawei manufactures thousands of 5G base stations a day, adding to the 2.3 million that China already has installed out of 3 million worldwide.
It has several assembly lines that each require 15 workers, compared to nearly 80 workers three years ago. Most of them are there to check that the automated assembly and testing equipment is doing its job properly; only one stage of assembly required human hands.
Detailed data isn’t available, but China’s auto industry—the world’s biggest buyer of industrial robots—has achieved remarkable gains in efficiency, allowing BYD and SAIC to offer electric vehicles at a price of around US$10,000. That’s less than China’s per capita gross domestic product (GDP), and comparable to the $800 price at which Henry Ford sold his first Model T in 1908, cheap enough so that any modestly prosperous family could afford a car.
China exported more than a million vehicles in the first three months of 2023, overtaking Japan as the world’s largest auto exporter, and its offerings at the low end of the EV price spectrum will help raise its market share in Europe as well as the Global South.
China’s authorities know that the Fourth Industrial Revolution will stall unless private entrepreneurs embrace the new technologies. The National Development and Reform Commission issued a July 24 directive calling on authorities at all levels to “mobilize the enthusiasm of private investment.”
Government bodies, the directive said, should “boost private investment confidence,” “focus on key areas and support private capital participation in major projects,” and “give full play to the important role of private investment.”
The NRDC will “select a group of enterprises with large market share and strong development potential,” “in line with the requirements of major national strategies and industrial policies” and “conducive to promoting high-tech enterprises.”
But the animal spirits of private entrepreneurs are not fired up by directives from bureaucrats, who aren’t qualified to pick winners among private firms. Beijing’s belated acknowledgment that China’s economic future depends on private risk-taking isn’t enough.
Chinese firms have to believe that the government won’t repeat its 2020-2021 crackdown on Alibaba and other Big Tech companies. And Chinese households, who have about 10% of their assets in stocks and 70% in real estate, have to invest in technology instead of houses. None of that will change overnight.
In July, Huawei’s Cloud division CEO, Zhang Pingan, unveiled Pangu, an AI system for a wide range of business applications. In contrast to ChatGPT and other so-called Large Language Models, the Huawei executive told the 6th World Artificial Intelligence Conference in Shanghai, “The Pangu model does not compose poetry, nor does it have time to compose poetry, because its job is to go deep into all walks of life, and help AI add value to all walks of life.”
The platform is powered by Huawei’s own Kunpeng chipset and Ascend AI processor. It’s a do-it-yourself system for training AI models on proprietary data. Huawei Cloud offers its customers “large-scale industry development kits. Through secondary training on customer-owned data, customers can have their own exclusive industry large models,” the company said.
Although “Nvidia’s V100 and A100 GPUs remain the most popular GPUs for training Chinese large-scale models,” a recent study notes, “Huawei used its own Ascend 910 processors” to train the Pangu model.
Second, China appears able to produce proprietary AI chips like Ascend, which requires 7-nanometer processors. US sanctions were supposed to prevent China from making 7nm chips for years, but Chinese chip fabricators appear to have worked around US restrictions—at a cost.
It’s hard to tell through the fog of tech war whether and to what extent US tech sanctions are holding back China’s rollout of business AI applications. Announcing Alibaba’s better-than-expected second-quarter results on August 10, the company’s Cloud division CEO mentioned that a short-term shortage of GPUs was a constraint on growth.
How rapidly Chinese businesses will adopt AI systems such as Pangu and its competitors is hard to predict. Pangu’s first commercial application to coal mining debuted in late July in a Huawei joint venture with Shandong Energy Group. Late in 2022, China’s largest appliance maker Midea opened China’s “first fully connected 5G smart factory,” according to a Huawei video.
China’s private entrepreneurs face some significant hurdles. It’s hard to quantify them, but a couple of simple parameters are helpful. The price-earnings multiple of China’s CSI 300 stock index is about 13, compared to 21 for America’s S&P 500. Equity is much cheaper in China, which means that entrepreneurs pay a lot more for capital than their American counterparts.
The riskiness of the Chinese equity index, moreover, is nearly double that of the S&P 500. The implied volatility of options on MCHI, the broad Chinese stock market ETF that tracks the MSCI China Index, is now roughly 30%, compared to just 16% for the VIX index of implied volatility for the S&P 500.
As recently as 2021, the implied volatility of the US and China indices was roughly equal. China employed AI-based systems to track and predict Covid outbreaks in 2020 and 2021, and China’s economy was the first to bounce back from the Covid recession. The more contagious strains of the virus defeated China’s systems in 2022, and the government responded with prolonged lockdowns (see “China’s avoidable Covid crisis,” Asia Times, May 13, 2022).
Another depressant is the continued upheaval in the property market, which in reality is a political standoff between the central government and local authorities who took on between RMB35 trillion and RMB70 trillion of so-called hidden debt.
The central government won’t bail out the cities without assuming control of their finances. On paper, municipalities own enterprises with RMB205 trillion in assets, and on the whole are solvent, but the political tug-of-war will keep the property market in crisis mode for some time.
If we believe analysts’ estimates for capital investment in China, private business remains cautious. Shown in the chart below are the Bloomberg consensus estimates for CapEx in several major sub-sectors of China’s CSI 300 Index. The only big increases in expected spending are in energy and utilities, both dominated by state-owned enterprises. Industrial and information technology company CapEx plans remain subdued.
The future of business AI, though, doesn’t depend entirely on large-capitalization companies. AI is a force multiplier for small and medium businesses, a Huawei executive told me during a tour of the company’s exhibition halls in Shenzhen.
Smaller shops can achieve very high efficiency in flexible manufacturing by applying AI to automated factories. Ultimately, industrial AI may incubate a new generation of manufacturing entrepreneurs, just as the internet upended retailing.
Huawei is a protean enterprise that is transforming itself from a telecom equipment maker into a global business facilitator. 5G2C (5G for consumers) is a mature business with limited growth prospects, and the company envisions a future based on 5G2B (5G for business), with a full suite of AI-based solutions.
Whether China’s entrepreneurs will come to the “Field of Dreams” built on high-speed broadband and AI remains an open question, but it’s still early days. As Alibaba and Huawei executives emphasize, the new Cloud-based AI systems just came online.
The political will and profit opportunities are visible, and China may yet surprise the world as much as it did during the 1990s and 2000s.
Follow David P Goldman on Twitter at @davidpgoldman
“Previously, Barisan Nasional had total support. I was formerly an UMNO leader myself. But now, that support has waned,” said the father of eight.
He added that the cost of replanting is pricey and commodity prices are not stable. Despite the debt reduction, bank interests are high and he sees no end to servicing them.
There are about eight so-called Felda seats with huge settlements for thousands of planters and their families in Malaysia’s southwest state of Negeri Sembilan.
The scheme began in the 1960s and was meant to lift rural Malays out of poverty and provide them with a stable source of income.
But today, settlers and their children complain that their welfare is not taken care of and some lament that they will always be indebted under the scheme.
Part of the debts were accumulated when the Felda farmers borrowed heavily to participate in the listing of the Felda Global Ventures in 2012.
Most of the investments resulted in losses, despite the government – led by UMNO at that time – promising good returns.
“The way I look at it, they are just helping the bank. I will die indebted. My children and their children will also be the same,” said Mr Nasir.
About 30 per cent of the around 800,000 registered voters in Negeri Sembilan are from the Felda community. However, almost half now live outside the settlements in major cities.
Many have switched their support to the opposition coalition Perikatan Nasional (PN).
“Most of (the voters are from) our stronghold, our fixed deposit in Barisan Nasional before. But lately, some of these Felda areas have been influenced by the opposition party,” said Mr Jalaluddin Alias, BN’s Negeri Sembilan chief.
“Now, we try our level best to serve them, to make sure that every settler, whether it is the first generation, second or third generation … are all under the government’s radar.”
In a recent bid to garner the support of rural Malays, Prime Minister Anwar’s administration claimed to have helped write off US$1.8 billion worth of debts held by Felda land settlers.
The opposition PN also claimed credit for the move, with the coalition’s chairman Muhyiddin Yassin insisting he had already resolved the waiver in 2021 when he was the prime minister.
“Felda voters understand how our chairman Muhyddin has helped them before. We can see that UMNO voters are now with Perikatan Nasional,” said Mr Ahmad Faizal Azumu, the deputy president of Bersatu leading the PN campaign in Negeri Sembilan.
The politicians’ claims and counterclaims regarding who is responsible for helping the Felda settlers reflect the importance of the settlers’ votes, said observers.
“I hope that Felda voters will come back to Barisan Nasional and also to the unity government,” said Mr Anthony Loke, secretary-general of the Democratic Action Party (DAP), one of four component parties in the ruling Pakatan Harapan (PH) coalition.
“We are just aiming to protect our own turf, to defend our own constituencies. If we can defend each of our own constituencies, then it will be a clean sweep of (all the) seats.”
Mr Loke is defending his rural state seat in Chennah, an area with predominantly Malay voters.
The unity government currently holds all 36 seats in Negeri Sembilan’s legislative assembly. PH occupies 20 seats while BN holds 16.
However, the opposition PN is claiming that chances are still 50-50 in the state, citing strong support from former-UMNO members and supporters who are angry with the party’s top leadership.
“We are serious about forming the government here, we are hoping for a 80 per cent voters turnout. Most UMNO supporters are now with us (PN),” said Mr Ahmad Faizal.
While it is defensive play for Mr Loke as the incumbent, he is not taking it for granted and has put in huge efforts to build rapport among UMNO, BN and PH grassroots – a move which he hopes will pay off on polling day.
“I have been here for two terms for 10 years. Never before did we get the UMNO crowds to come to our programme. But today, the UMNO machinery came and we have created a lot of synergy,” he said during a campaign event that saw UMNO supporters in attendance and sharing teh tarik (milk tea) and goreng pisang (fried banana fritters) with DAP politicians.
With campaigning nearly done and dusted, analysts said a united PH and BN machinery may just be what the new alliance needs to bring out their voters in order to win Saturday’s elections.
ReutersCountry Garden, which is one of China’s biggest property developers, has warned that it could see a loss for the first six months of the year of up to $7.6bn (£6bn).
The announcement is the latest signal of the major issues faced by the world’s second largest economy.
This week official figures showed China had slipped into deflation for the first time in more than two years.
Exports have also fallen sharply, while youth unemployment is at a record high.
Country Garden Group “is expected to record a net loss ranging from approximately RMB45 billion [$6.24bn; £4.9bn] to RMB55 billion for the six months ended 30 June 2023,” the company said in an announcement to the Hong Kong Stock Exchange.
The expected loss compares to a $265m profit for the same time last year.
The firm also said it has set up a special task force, headed by its chairman Yang Huiyan, to find ways to turn the business around.
Earlier on Thursday, rating agency Moody’s downgraded the company’s rating, citing “heightened liquidity and refinancing risks”.
It came as China faced a number of economic challenges, which have raised questions about the pace of its post-pandemic recovery.
Earlier this week, official figures showed the country’s exports fell by a larger-than-expected 14.5% in July compared with a year earlier, while imports dropped 12.4%.
Youth unemployment, which is at a record high, is also being closely watched as a record 11.58 million university graduates are expected to enter the job market this year.
On Thursday, US President Joe Biden said China’s growing economic issues make it a “ticking time bomb.”
At a fundraising event in the western state of Utah, Mr Biden also said “China is in trouble” as he highlighted its high unemployment and aging workforce.
The country is also tackling ballooning local government debt and challenges in the housing market.
Last month, Evergrande, which was once China’s biggest real estate firm, revealed that in 2021 and 2022 it lost a combined $81.1bn.
The firm, which defaulted on its debts in late-2021, reported its long overdue earnings to investors.
Evergrande has been struggling with an estimated $300bn of debts.
The huge losses highlight how much the developer was rocked in recent years by the property market crisis in China.
The difficulty in comparing America’s and China’s influence in the Middle East is that the two operate on entirely different planes. [Note: The Chinese use the term Western Asia, rather than the Middle East, to refer to a region that includes the Levant, Iraq, the Gulf, Turkey and Iran.]
Despite China’s impressive naval construction program, China cannot challenge American dominance of the seas within any definable time horizon. There is no indication that China has or soon will develop the capability to put boots on the ground in the region.
At the same time, China’s economic and technological presence has jumped during the past several years, and the United States cannot compete with China in critical areas such as broadband infrastructure.
China’s military presence in the Middle East remains small. Its 200 marines at the Djibouti naval base are on standby for anti-piracy and civilian rescue operations. China reportedly has sponsored the creation of a joint maritime force including Saudi Arabia, Iran, the UAE, and Oman, but has committed no ships to the project.
A February 2013 note from the American Enterprise Institute observes, “Current Chinese basing capacity and force commitment in the region seem insufficient to support the level of economic and diplomatic engagement that appears to be Beijing’s new normal, so Washington should prepare for further expansion.”
There have been rumors about plans for a Chinese naval base in the UAE, so far unconfirmed. The latest Pentagon assessment of China’s military does not predict an expansion of China’s expeditionary capability. China has just 30,000 marines versus America’s 200,000, and perhaps 12,000 special forces versus America’s 70,000.
In August 2014, US President Barack Obama complained that China was a “free rider” in the Persian Gulf, letting the United States bear the cost of a blue-water fleet that protected China’s oil supplies The charge was fair: Although China has dramatically increased its military spending, its commitments to the Middle East remain de minimus. China remains a free rider.
If the American commitment to protect shipping lanes erodes, China may step in, but that remains hypothetical. For the time being, China will devote the bulk of its military resources to coastal defense, including medium- and long-range missiles, the J-20 interceptor, satellites, electronic warfare and submarines.
In the meantime, China’s position is that its interests in the region do not conflict with America’s.
Pan Guang of the Shanghai Academy of Social Sciences told the “Observer” website in 2022: “China’s economic investment and US military investment can complement each other in some places, such as in the Gulf countries. It is very simple. Several major overseas military bases of the United States are there. The largest military base is in Qatar, there are two in Saudi Arabia, and there are also in the United Arab Emirates. However, the infrastructure construction in these countries is not done by American workers, but by Chinese workers. And laborers from Southeast Asian and South Asian countries such as Thailand, the Philippines, Sri Lanka, and India are doing it.”
China’s exports to Saudi Arabia at the end of 2022 and early 2023 reached an annual rate of about US$45 billion, roughly double the pre-Covid volume. By contrast: In 2014, European Union exports to KSA peaked at $45 billion, but fell to just $33 billion in 2022.
US exports peaked at $19 billion in 2015 and fell to $11.5 billion in 2022. China has displaced the US and Europe as the leading supplier of industrial goods to Saudi Arabia, including telecom infrastructure, solar power, mass transit and other high-tech items.
China’s exports to Israel doubled between 2018 and 2021 and have held steady since (though remain at a level far below Europe’s exports). Interestingly, China’s exports to Iran are a small fraction of their 2014 level, perhaps reflecting the impact of sanctions on Iran.
Also notable is the surge in Chinese exports to Turkey and Central Asia. These have nearly tripled from pre-Covid levels, for several reasons, including Turkey’s role as an intermediary between China and Russia, especially for sanctioned goods.
A key component of the economic relationship with Turkey and Central Asia is China’s commitment to building land transport—railroads and pipelines—across Asia. Given the possibility – however small – of US interdiction of China’s trade with the Gulf in the event of war, China is building alternative means of transport. It’s cheaper to build railroads than navies.
China’s goals are in part guided by long-term strategy and in part reactive and opportunistic. Its long-term interests in the region, in descending order of importance, are these four:
China has other, smaller objectives, for example, more access to Israeli technology. China has no strategic interest in the Palestinian issue. Its offer to mediate an Israeli-Palestinian peace is a diplomatic fishing expedition. The proposal puts pressure on Israel at no cost to China, and may build Chinese bargaining chips in future negotiations with Israel.
American analysts often look for a hidden Chinese plan to parlay economic power into political or military influence. This misses the salient point. China’s influence stems from raw economic power, in particular from a near-monopoly on critical technologies that the region requires.
Huawei is a better provider of mobile broadband than Ericsson or Nokia. The United States produces no broadband infrastructure at all. In the case of solar power, a technology of enormous interest to the Gulf states, China exercises a near monopoly on the production of solar cells.
Huawei offers an AI-controlled solar cell with enhanced efficiency. China also produces port management technology; its fully-automated Tianjin Port was designed as an export product. Market dominance in key technologies creates long-term dependence on China.
Another consideration for China is the American withdrawal from Afghanistan. Authorities in China (as well as Russia and India) are worried about Muslim radicalism in Central Asia, and China’s diplomatic and economic emphasis on the region to some extent is an attempt to fill the gap left by the United States – and if possible draw the Taliban regime into a more business-oriented mode (based on Chinese development and exploitation of Afghani natural resources).
The Ukraine war, moreover, has enhanced China’s influence in several ways. First, US sanctions against Russia – especially the unprecedented seizure of hundreds of billions of dollars of its foreign exchange reserves – have made China’s RMB more attractive as a reserve and trade-finance currency.
Second, Turkey’s position as a trade intermediary for Russia (both for Russia’s imports of sanctioned goods and exports of hydrocarbons) has enhanced Turkish standing. Third, India’s emergence as the leading customer for Russian oil has vitiated America’s effort to enlist India in an anti-China coalition, indirectly enhancing China’s strategic position.
More generally, China’s exports to the Global South are having a transformative effect on many countries. Broadband infrastructure is a game changer, enabling a whole range of technologies ranging from micro-finance to telemedicine.
There are numerous areas in which Israel’s pockets of expertise – in agriculture, environmental technology, water management, medicine, and AI – could find synergies with China’s infrastructure-building campaign.
For example, Israeli expertise in water management, environmental controls and desert agriculture dovetails with China’s initiatives in the Global South. I have argued elsewhere that the United States should initiate a Western consortium to compete with China, but this remains purely hypothetical.
Iran remains the greatest source of uncertainty. The Iran-Saudi deal mediated by Beijing has not led to any improvement in the extremely depressed state of Sino-Iranian trade. It is important for Beijing to understand that if Iran comes close to readying nuclear weapons, Israel will be forced to act in its own strategic interests, and the consequences of such action may be detrimental to China’s economy.
China is not challenging America’s military presence in the Middle East nor is America challenging China’s leadership in trade and infrastructure investment.
Although China’s direct military involvement remains minimal, its economic influence will strengthen and shape relationships in the region, for instance, the Chinese-built infrastructure that enhances Turkey’s relations with Central Asia.
Meanwhile, America’s attempt to contain China technologically is ineffective and fundamentally misguided, as I have argued elsewhere, posing problems for America’s traditional allies in the region.
Israel has no alternative to this alliance but should explore opportunities with China that do not undermine it. Israel should continue to find ways to work with China and its regional trading partners in non-military areas, despite American pressures to the contrary.
David P Goldman is Deputy Editor of Asia Times. He was global head of debt research at Bank of America 2002-2005. His most recent book is You Will be Assimilated: China’s Plan to Sino-Form the World.
This article first appeared in The Jerusalem Strategic Review and is republished with kind permission. Read the original here.
Seeing “China Evergrande Group” trending on global search engines is the last thing Xi Jinping needs as 2023 goes awry for Asia’s biggest economy.
News that exports plunged 14.5% in July year on year was the latest blow to China’s hopes of growing its targeted 5% this year. It’s the biggest drop since February 2020, when Covid-19 was sledgehammering trade and production worldwide.
Yet the default drama at Country Garden Holdings is a reminder that the call for help is coming from inside China’s economy.
This week, Country Garden was trending in cyberspace as it faced liquidity troubles akin to those of the humbled China Evergrande in 2021.
The whiff of trouble that tantalized markets in recent weeks proved true amid reports noteholders failed to receive coupon payments due on August 7.
That has global investors worried about an Evergrande-like domino effect. “If Country Garden, the biggest privately owned developer in China, goes down, that could trigger a crisis in confidence for the property sector,” says Edward Moya, senior market analyst for Oanda.
Analyst Sandra Chow at advisory firm CreditSights notes that “with China’s total home sales in the first half of 2023 down year-on-year, falling home prices month-on-month across the past few months and faltering economic growth, another developer default – and an extremely large one, at that – is perhaps the last thing the Chinese authorities need right now.”
The risk is slamming investor sentiment toward China. And it spotlights the urgent need for Chinese leader Xi and Premier Li Qiang to repair the shaky property sector and accelerate state-owned enterprise (SOE) reform.
A more vibrant and resilient property market is crucial to China’s economic recovery in the short run and reducing the frequency of boom-bust cycles in the longer run. The sector, if running smoothly, can generate as much as one-third of China’s gross domestic product.
Earlier this month, Li pledged to “adjust and optimize” Beijing’s approach to building a healthier, more stable property market. Li has urged major cities to devise measures to stabilize markets in their own jurisdictions.
That followed a pledge by the People’s Bank of China (PBOC) to provide developers with 12 additional months to repay their outstanding loans due this year.
This week’s default chatter raised the stakes. On August 3, Moody’s Investors Service slashed Country Garden’s credit rating to B1, putting it in the “high risk” category.
“This downgrade reflects our expectation that Country Garden’s credit metrics and liquidity buffer will weaken due to its declining contracted sales, still-constrained funding access and sizable maturing debt over the next 12 to 18 months,” says Moody’s analyst Kaven Tsang.
Country Garden’s stock has cratered over the last week after the company’s warning of an unaudited net loss for the first six months of 2023. Clearly, Country Garden has been grappling with liquidity chaos for some time.
As the company noted in a July 31 exchange filing, it “will actively consider taking various countermeasures to ensure the security of cash flow. Meanwhile, it will actively seek guidance and support from the government and regulatory authorities.”
A day later, Country Garden reportedly canceled an attempt to raise US$300 million by selling new shares.
As analysts at Nomura wrote in a note, “recent signals from top policymakers… suggest Beijing is getting increasingly worried about growth and have clearly recognized the need to bolster the faltering property sector. They are starting a new round of property easing and may introduce some stimulus to redevelop old districts of large cities.”
More important, though, is for Xi and Li to tackle the underlying cracks in the financial system. The sector’s troubles are structural, not cyclical.
Thanks partly to slowing urbanization and an aging and shrinking population, demand for new housing is on the wane. When economists worry about a Japan-like “lost decade” in China, the unfolding property crisis is Exhibit A.
The more that already massive oversupply increases, the more difficult it’s becoming for Beijing’s stimulus to flow through to construction activity.
And the more the property sector acts like a giant weight around the economy’s ankles, the more China’s financial woes look like Japan’s bad-loan crisis.
This dynamic is a clear and present danger to China’s ability to surpass the US in GDP terms, a changing of the economic guard many thought might happen as soon as the early 2030s. Yet so is the slow pace of SOE reform as China’s economic model shows growing signs of trouble.
Xi and Li clearly understand the urgency. In recent months, Xi’s Communist Party set out to help boost the valuations of SOE stocks, which represent a huge share of China’s overall market.
According to Goldman Sachs Group, SOEs in sectors from banking to steel to ports account for half the Chinese stock market universe. Yet Xi’s talk of creating a “valuation system with Chinese characteristics” is a work in progress, at best.
The SOE conundrum is a microcosm of Xi’s challenge to balance increasing the role of market forces and boosting investment in listed state companies, while also pulling more international capital China’s way.
In his second term in power, from 2018 to 2023, Xi more often than not tightened his grip on the economy at the expense of private sector development and dynamism.
The most drastic example was a tech sector crackdown that began in late 2020. It started with Alibaba Group founder Jack Ma and quickly spread across the internet platform space.
Since then, global money managers have grown increasingly more cautious about investing in Chinese assets. This, along with a steady flow of disappointing economic data, is undermining Chinese stocks, which are among the worst-performing anywhere this year.
That has given Xi and Li all the more reason to ensure that the practices of China’s largest state-owned giants come into better alignment with global investors’ interests and expectations.
China needs a huge increase in global investment to realize its vision for a 5G-driven technological revolution. Monetary stimulus can’t get China Inc there any more than Bank of Japan stimulus can revive Japan’s animal spirits.
Given the fallout from Covid-19 and crackdowns of recent years, China’s biggest tech companies are no longer cash rich or self-supporting. And the transition from SOE-driven to private sector-led growth has become increasingly muddled.
“If SOEs are able to pick and integrate the right targets, control risk effectively and promote innovation, outcomes should be credit-positive for the firms involved and beneficial for China’s growth,” says analyst Wang Ying at Fitch Ratings.
The global environment hardly helps, as evidenced by recent declines in export activity. US efforts to contain China’s rise – whether one calls it “decoupling” or de-risking” – is an intensifying headwind.
On August 9, US President Joe Biden detailed new plans to curb American investments in Chinese companies involved in perceived as sensitive technologies such as quantum computing and artificial intelligence.
Though nominally aimed at preventing US capital and expertise from flowing into mainland technologies that could facilitate Beijing’s military modernization, the limits are sure to have an added chilling effect on market sentiment.
Lingering pandemic fallout hardly helps. Adam Posen, president of the Peterson Institute for International Economics, a Washington-based think tank, argues that China is suffering “economic long Covid” that could mean its condition is even weaker than global markets realize.
In a recent article in Foreign Affairs, Posen said that “China’s body economic has not regained its vitality and remains sluggish even now that the acute phase – three years of exceedingly strict and costly zero-Covid lockdown measures – has ended.
He warns that the “condition is systemic, and the only reliable cure – credibly assuring ordinary Chinese people and companies that there are limits on the government’s intrusion into economic life – can’t be delivered.”
Xi is, of course, trying. The campaign, which recently fueled a jump of over 50% in some SOE stocks, is accompanied by a slogan of buying into a “valuation system with Chinese characteristics.”
Last month, Chinese Vice Premier Zhang Guoqing said the government is redoubling efforts to deepen and hasten SOE reform.
Zhang, a member of the Political Bureau of the Communist Party of China Central Committee, said the aim is to boost core competitiveness and prod SOEs to innovate, achieve greater self-reliance and raise their science and technology games.
More recently, Liu Shijin, a former vice minister and research Fellow of the Development Research Center, said government agencies must begin viewing entrepreneurs not as “exploiters” but as growth drivers.
But pulling off a transition toward private sector-driven growth would be much easier to pull off if China’s underlying financial system was more stable. The biggest risks start with the property sector.
“The problems of China’s property developers are only getting more severe,” says economist Rosealea Yao at Gavekal Dragonomics.
“The sales downturn is likely to throw many more private-sector developers into financial distress — a risk underscored by Country Garden’s recent missed bond payments. Unless sales can be stabilized, developers will be trapped in a downward spiral.”
Yao cites three reasons why a continued downturn in sales could push many private sector property developers into financial distress.
First, private developers have been mostly shut out of capital markets and thus unable to roll over maturing bonds since late 2021, when China Evergrande fueled investor concerns that other highly leveraged private sector developers would also be unable to repay their debts.
“Private sector developer issuance in the onshore bond market is now minimal, and has collapsed in the offshore market as well,” Yao says. “Companies with state ownership, by contrast, still mostly retain the faith of onshore bonds with bondholders demonstrating that they are not entirely risk-free.
“The combination of both weak revenues and lack of refinancing ability has led many firms to default or negotiate repayment extensions since the start of 2022, and the number of defaults and extensions remains elevated this year.”
Two, cash liquidity positions of private sector developers are deteriorating. According to the annual reports of 86 non-state-owned developers, she notes, short-term liabilities exceeded cash on hand by 725 billion yuan ($100 billion) in 2022, compared to a shortfall of 171 billion yuan ($23 billion) in 2021.
“This,” Yao says, “suggests that the firms may have insufficient liquidity to repay their maturing debts – though Country Garden boasted more cash on hand than its short-term liabilities at the end of 2022, suggesting this measure could understate the problem, as developer reserves may be shrinking rapidly this year.”
Third, many private-sector developers are not just illiquid – they are getting closer to insolvency. That is mostly due to rising impairment charges as the companies are forced to recognize that assets on their balance sheets have declined in value, often under pressure from auditors.
“Such charges deplete the asset side of companies’ balance sheets, pushing them closer to a situation in which the value of their liabilities could exceed the value of their assets — similar to the more traditional path to insolvency through negative net profits reducing equity,” she adds.
Again, Xi and Li clearly know what needs to be done to put China on more solid economic and financial ground. They just need to accelerate badly needed reform moves – before more indebted property developers like Country Garden hit investor confidence in the country’s prospects and direction.
Follow William Pesek on Twitter at @WilliamPesek
The cash crunch at Country Garden, once the largest property developer in China by sales, has worried many homebuyers who have paid for but not yet received their apartments.
Some commentators called on the Chinese government to look into the matter and ensure that the property developers will deliver apartments to buyers.
The calls came after Country Garden failed to pay interest, due Sunday, on two bonds worth a total of US$22.5 million.
Although the company can pay within a 30-day grace period to avoid a default, it still has to repay US$2.9 billion of bonds by the end of this year, according to data compiled by Bloomberg.
Over the past two years, most Chinese property developers have cut their property prices by more than 50% to boost revenue and lower gearing, but many homebuyers remain reluctant to enter the markets as they are suffering from unemployment or otherwise unstable income. They have become very cautious in home purchases since Evergrande Group faced liquidity problems in 2021.
“Don’t let Country Garden collapse!” Wang Xinxi, a Guangdong-based business writer, says in an article published on Wednesday. “For the moment, it’s very important to avoid the default of Country Garden, which will hit the property sector and create a systemic risk to the banking sector.”
“The company has built many properties in the third- and fourth-tier cities but residents there have low incomes,” Wang says. “Many people used savings from parents and relatives to buy their homes. They won’t be able to receive their properties if Country Garden goes bankrupt.”
He says such a crisis will affect other property developers and homebuyers while home owners also cannot sell their properties in the secondary markets.
He criticizes Country Garden and other property giants for having used a high leveraging strategy to boost their sales over many years. He says the only thing that these developers can do now is to sell their apartments at huge discounts to repay debts.
A Shanghai-based commentator using a pen name “Huoyi” published an article with the title “Country Garden is a much bigger crisis than Evergrande” on Wednesday.
“Country Garden said its total assets amounted to 1.54 trillion yuan (US$214 billion) at the end of 2022 while its total liabilities were 1.23 trillion yuan. It seems that it had net current assets of more than 300 billion yuan but it’s hard to know whether the company has any hidden debts,” Huoyi says. “Evergrande had once said its liabilities were about 1.8 trillion yuan but it turned out that they reached 2.44 trillion yuan.”
He says Country Garden recorded 668 billion yuan of contract liabilities at the end of last year, meaning that it still owes one million flats to homebuyers.
The writer says there’s no doubt that Evergrande’s founder, Hui Ka-yan, was very extravagant but he spent and invested most of his money domestically and could trace it. He says it is worrying that Country Garden has invested in many overseas property projects, including those in Malaysia, Singapore, Vietnam and Thailand.
On March 30, Country Garden said its revenue dropped 17.7% to 430.4 billion yuan for the year ended December 30, 2022 from a year earlier. Gross margin fell from 17.74% to 7.64%.
The Fosan-based firm recorded a net loss of 6 billion yuan in 2022, compared with a net profit of 26.8 billion in 2021. It has been the company’s first net loss in 15 years since it was listed in Hong Kong in 2007.
The company had 69,932 full-time employees at the end of last year, down from 100,705 a year earlier.
On Sunday, it failed to pay two dollar-bond coupons. Both bonds, US$500 million each, are listed in Singapore and will mature in 2026 and 2030.
The company said its usable cash has been steadily shrinking, showing “periodic liquidity stress” due to the deteriorating selling and refinancing environment, and the impact of various fund regulations.
CreditSights, a research unit of Fitch Group, says in a research report published on Tuesday that Country Garden’s struggle to address even a modest coupon payment underscores the extent of its cash crunch.
“Country Garden’s ability to remain above water has become increasingly challenging amid poor contracted sales generation, high exposure to lower-tier cities, limited funding avenues and a stretched liquidity position,” it says.
With falling home prices month-on-month across the past few months and faltering economic growth in China, another large developer’s default is the last thing the Chinese authorities need right now, CreditSights says.
It says Country Garden’s woes have spilled over to affect sentiment regarding other property developers and will hurt overall homebuyer sentiment.
A property columnist writes in an article published in May that Country Garden has significantly cut prices for its apartments over the past few years.
He says the company is now selling its apartments at about 6,000 yuan per square meter in a rural area in Guangzhou, down from the peak of 12,000 yuan per square meter in 2018. He says its apartments in a prime site in Dongguan are now priced at 25,000 yuan per square meter, compared with 35,000 yuan per square meter in the past.
He says nearby homeowners were upset by these sales promotions as their property values were dragged down.
In the second half of 2021, Evergrande, the largest Chinese property developer by land bank at that time, had a serious liquidity crunch. Clients of Its wealth management units also complained that they could not get their money back after the products they bought matured.
Evergrande started restructuring its debts early last year in response to the Guangzhou government’s intervention. Hui was ordered by officials to sell his personal assets to repay debt and ensure that his company would continue to deliver apartments to homebuyers.
The company did not announce its 2021 results until July 17, 2023. It lost a combined 803 billion yuan in 2021 and 2022. At the end of last year, it had net current liabilities of 687.7 billion yuan and total liabilities of 2.44 trillion yuan (US$339 billion), which almost hits Hong Kong’s 2022 nominal gross domestic product (US$360 billion).
The company has not yet gone bankrupt and is still negotiating with foreign creditors for a haircut in its debts.
Read: China to boost consumption, private investments
Follow Jeff Pao on Twitter at @jeffpao3
