Trade War

Newsletter 183 - October 1, 2023

Welcome to the 183rd edition of Trade War.

Future of debt-laden property developer Evergrande uncertain after chairman Xu Jiayin put under police surveillance. Xu’s wealth and flamboyance may have sparked Xi Jinping’s ire. And China’s real estate sector to become a smaller growth engine, says former PBOC advisor.

Following similar fate for Nomura banker, a senior executive at American investigations firm Kroll has been banned from leaving China. And European Union action against Chinese EV subsidies to target Tesla’s Shanghai operations.

More signs of recovery this time in manufacturing, as China moves into its Golden Week holiday, but will it last? Measuring the size of China’s debt isn’t easy but it is reaching crisis levels, experts say. ADB downgrades growth forecast below official 5% target. And for first time in 20 years, capital inflows are falling in China while rising in emerging markets.

~ ~ ~ Plus my thoughts on China’s growing tendency to hide things and its strategic shift towards the global south ~ ~ ~

• The Year of Living Secretly
  When I was a foreign correspondent in China, it was an open secret that one could not trust the economic numbers published by Beijing. But in the years following China’s entry into the World Trade Organization in 2001 it seemed as if real effort was being made to improve their reliability, as Beijing sought to draw more foreign investors. As I wrote in 2012, policymakers were “trying to address the government’s statistical shortcomings.” No longer…

  Call it ‘The Year of Living Secretly‘: Beijing has chosen opacity over openness. It is doubling down on more state control over the economy under Xi Jinping and restricting access to all kinds of information. Everything from land sales, currency reserves, bond transactions, official biographies, academic information, COVID deaths, and most recently soaring youth unemployment, is being treated as akin to a state secret.

  What is behind the trend? The economy is rapidly deteriorating and Beijing has no desire to publicize that fact.

Read more about Beijing’s growing bent for secrecy plus the latest news about China’s push into the Global South in the Atlantic Council’s Global China Newsletter.

Now on to the week’s news:

Evergrande chairman under police surveillance

Xu Jiayin, the chairman of embattled property giant Evergrande, has been put under police surveillance and trading in his company’s Hong Kong shares were halted on Thursday, ominous signs for both Xu and the firm’s future.

Xu’s son Peter Xu, who previously was in charge of Evergrande’s wealth unit, was also taken into custody, according to Chinese media reports.

Evergrande borrowed more than $300 billion before it defaulted in 2021, helping spur China’s current real estate crisis. Since then its share have fallen precipitously and in August Evergrande filed for bankruptcy in New York.

The 64-year-old chairman, a longtime communist party member, was born in poverty to the son of a wood carver, before rising to become Asia’s second-richest person, with a net worth in 2017 of $42 billion. Today Xu’s fortune has dropped to $1.8 billion, according to the Bloomberg Billionaires Index.

On October 30 a hearing will be held in Hong Kong court that could force Evergrande into liquidation, reports Bloomberg News.

“It is too early to say Evergrande will end up in liquidation, but such risk is clearly rising,” says Natixis Asia senior economist Gary Ng. “For the government, it shows no single developer is too big to fail in China.”

“It is still possible for Evergrande to have a new restructuring plan should it fulfill the regulatory requirement, but the process can be longer than before and it is uncertain whether creditors would accept the likely worse terms,” Ng added.

If Evergrande were allowed to collapse, "that could spiral, affecting other indebted companies and further hurt the overall property sector which is very important to the growth of the economy," Dexter Roberts, director of China affairs at the Mansfield Center at the University of Montana and a senior fellow at the Atlantic Council, told the BBC’s Peter Hoskins and Mariko Oi.

"At the same time, many people whose household wealth is mainly in their apartments will also be badly hurt," Roberts said.

Up to 90 percent of household wealth in China is tied up in apartments while some one-quarter of China’s economy has been driven by the property sector and related industries, Harvard University’s Kenneth Rogoff and the IMF’s Yuanchen Yang estimated in a 2022 report Peak China Housing.

Mr Roberts, who spent more than two decades in China as a journalist, said "the old Evergrande no longer exists" and while the authorities may keep it afloat, "it will be as a radically diminished company," reports the BBC.

Ultra rich Xu Jiayin a ‘natural target’ for Xi

Xu Jiayin, also known as Hui Ka Yan, is “an example of how anybody can become rich if you're smart enough and if you work hard enough,” Alicia Garcia Herrero, the chief economist for Asia-Pacific at French investment bank Natixis, tells the BBC.

But Xu’s tendency towards ostentatious display of wealth, may have put him in Xi Jinping’s crosshairs. In 2012, a picture of the Evergrande chairman wearing a Hermes belt with a gold buckle at a party conference went viral, earning him the monicker “belt brother.”

Xu’s “maximum leverage” business approach helped drive Evergrande’s growth, according to Jackson Chan of Bondsupermart, a financial markets research platform.

"Evergrande grew fast but even faster after [Xu] made friends with a group of [the] richest real estate tycoons in Hong Kong and the company was listed on [the] Hong Kong Stock Exchange," Chan says."He received numerous support from these friends as they bought a lot of Evergrande's stocks and bonds to help the company grow."

Xu is "the symbol of extreme wealth especially with his flamboyant lifestyle, flying around the world in his private jet," the author of this newsletter says to the BBC.

"Xi has made it clear that extreme wealth, especially when displayed publicly like Xu, isn't good for the economy and the society," Roberts said, adding that the Evergrande chairman was "seen as a natural target."

Evergrande stiffing households is last straw?

“China Evergrande Group wiped out international investors, roiled financial markets and left thousands of suppliers in the lurch. Yet it was the developer’s failure to pay households who invested in its wealth management products that may have provided the last straw for Chinese authorities,” reports Bloomberg News.

“The actions came after the company’s money management arm said it was unable to make payments in August on investments held by retail clients. Evergrande, like many other Chinese developers, sold high-yielding wealth management products to individual investors to help fund their operations when other financing avenues were becoming tougher to tap.”

Property growth engine to become ‘much smaller’

Property stocks have fallen to their lowest level in over a decade and a real estate recovery could take as long as a year, says a former PBOC advisor.