Top financial firms bet against Xi's deleveraging campaign, Six countries join U.S. in Olympic boycott & RSF says China is "world's biggest captor of journalists" -- China Boss 12.13.21
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The Big Story in China Business
Top financial firms bet against Xi's deleveraging campaign
China Evergrande Group has defaulted on its debt, according to Fitch Ratings.
Fitch Ratings - Hong Kong - 09 Dec 2021:
Fitch Ratings has downgraded to 'RD' (Restricted Default), from 'C', the Long-Term Foreign-Currency Issuer Default Ratings (IDR) of Chinese homebuilder China Evergrande Group and its subsidiaries, Hengda Real Estate Group Co., Ltd and Tianji Holding Limited. Fitch has affirmed the senior unsecured ratings of Evergrande and Tianji at 'C', with a Recovery Rating of 'RR6', as well as the Tianji-guaranteed senior unsecured notes issued by Scenery Journey Limited at 'C', with a Recovery Rating of 'RR6'.
The downgrades reflect the non-payment of coupons due 6 November 2021 for Tianji's USD645 million 13% bonds and USD590 million 13.75% bonds after the grace period lapsed on 6 December. The non-payment is consistent with an 'RD' rating, signifying the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a material financial obligation.
As China Boss noted last month, Beijing is trying to break up Evergrande slowly to stave off a property market collapse that analysts fear could spread through the wider economy. Last week, in an opinion piece for Financial Times, Robert Armstrong explained those efforts more amusingly:
Armstrong, FT:
The Chinese authorities seem to be trying to do with Evergrande what they did successfully (to date) with the over-extended insurer Anbang: some sort of orderly, break-upy, liquidationy thingy which will not require a general bailout of the sector, or fiscal and monetary juicing of the economy.
This will involve state-owned entities taking Evergrande’s assets and liabilities at prices that will not require big losses to be recognised. The government’s goal is “to reach a balance between short-term stability and long-term reforms”, as Chaoping Zhu, of JPMorgan Asset Management, put it in the Financial Times today. Which is, if you think about it, what we’re all trying for in life, isn’t it?
But the $55 trillion question - the amount Oxford University's China Center associate and UBS Investment Bank adviser George Magnus says China’s real estate market is worth - on economists’ and analysts’ minds is whether President Xi Jinping will continue his deleveraging strategy or abandon it to save China’s economy.
Large foreign investment firms are betting hundreds of millions of dollars on the latter. According to Bloomberg, former Goldman Sachs banker Jason Brown "raised an initial $245 million for a new fund that will invest in loans and bonds of China’s beleaguered property industry.”
Bloomberg:
Jason Brown’s Hong Kong-based Arkkan Capital has completed a first close for the Arkkan China Real Estate Fund and plans to raise more money in the first half of next year, it said in an emailed statement dated Wednesday. It will target stressed and distressed assets.
T.Rowe Price Group Inc., Allianz Global Investors and Goldman Sachs Asset Management are also plunging deep into Chinese real estate despite massive sell-offs.
In a move last Monday that some believe validate that approach, China’s central bank cut the required reserves ratio (RRR), releasing $188 billion into the national economy to buttress against real estate defaults. That advance arrived “on the same day” as the CCP Politburo’s statement which said “‘ensuring stability’ would be a top priority in the coming year,” CNN reported.
Before continuing further, however, China Boss wants you to know about the well-established practice among China analysts of attributing policy signals to ambiguous political language in high-level officials’ statements. In monetary policy, it can be loosely analogized to the way some U.S. experts parse through comments made by Federal Reserve officials for hints at the next interest rate cut or increase. In the PRC context, however, the endeavor is more intricate and challenging. Frankly, China Boss wouldn’t put her money on weird Leninist rhetoric embedded in propaganda - which is fully steeped in Xi thought these days - but others could have different risk tolerances she guesses.
That some of the big multinational investment banks seized their opportunities weeks and months earlier than PBOC’s requirement cut, however, makes China Boss wonder what (or who) they thought they knew. The firms’ analysts also seem to be in lockstep with Larry Hu, head of China economics for Macquarie Group, who was ranked in the top five China economists in 2015 by Institutional Investor Survey and Bloomberg China Economic Forecaster. Hu is so confident that Beijing will ease regulations to prevent a liquidity crisis he wrote a well-cited research note on it.
According to Financial Times and CNN analysts who’ve seen the note, Hu and co-author Xinyu Ji, also a Macquarie associate, say that “[t]he RRR cut and the ‘dovish’ tone at Sunday’s Politburo meeting suggest the ‘policy priority is shifting from regulatory tightening to supporting economic growth’ and ‘monetary and fiscal policies would turn from tightening to loosening in the coming quarters, though gradually.” Emphasis on “suggest,” here, to suggest the peculiarity of forecasting that President Xi will turn back on a personal crusade to rid the nation of over-leveraging - something that China’s leader almost certainly perceives as a direct threat to his and the Party’s continued rule - based on “dovish tones” and one PBOC move, assuming that’s how Hu arrived at his conclusion in the first place. (Yes - something more questionable was “suggested” there, too.)
FT:
They suggest that the “credit impulse” (new credit’s contribution to gross domestic product growth) has bottomed and will turn up, and fiscal deficits, which have been falling for a year, are ready to increase again. The result? Stock market valuations should rebound . . .
But not necessarily so, says at least one analyst - Michael Howell of CrossBorder Capital, who thinks there’s “little evidence that policy will loosen.” Howell also noted “PBoC’s open-market operations (buying or selling bonds from banks, basically)” as an instance where the government’s moves failed to inject the expected liquidity.
Hope you like suspense-thrillers.
This is one you don’t wanna miss. The lead character is a powerful, increasingly risk-tolerant and stubborn socialist dictator who, once again, finds himself pitted against a herd of evil and unruly capitalists! Leverage is his name, and he’s out to teach anyone who poses a threat to the establishment’s power a painful lesson.
But barbarians are climbing over themselves to wager against one of Leverage’s most important plans. Worse, they’re threatening the plan’s success by loading his adversaries with ‘hanging-on” cash. But that will make deciding who falls first easier.
Then there’s the real possibility for economic catastrophe, whether or not Leverage can best his enemies, and for instability as fear increases throughout the land. Such a dramatic turn of events would undermine the establishment’s ability to rule with an iron fist and likely cause a myriad of ripple effects that would have us all jumping out of our seats at the end.
For the Fitch Rating Action Commentary, Fitch Downgrades Evergrande and Subsidiaries, Hengda and Tianji, to Restricted Default, click here. For Armstrong’s opinion in FT, Will China have to loosen policy?, click here.
For Bloomberg’s report, Goldman Snaps Up China Property Debt as Others Back Away, click here. For Bloomberg’s report on Brown’s fund, Ex-Goldman Manager Raises Fund for China Property Debt, click here. For CNN’s update, China pumps $188 billion into the economy to counter real estate slump, click here.
Law and International Xi
US, Australia, UK, Canada, Lithuania, and Scotland announce diplomatic boycott of 2022 Winter Olympics
The White House announced its decision to stage a diplomatic boycott of the 2022 Beijing Winter Olympics on Monday, CNN reported.
CNN:
US athletes will still be allowed to compete in the Olympics, but the administration will not be sending government officials to the games. The same policy applies for the Paralympic Games, which are also taking place in Beijing.
The White House is looking to send a "clear message" that the human rights abuses in China mean there cannot be "business as usual," Psaki told reporters at a White House briefing.
On Wednesday, both Australia and Britain announced that they “will join the United States in a diplomatic boycott of the Winter Olympic Games in Beijing, their prime ministers said on Wednesday, as other allies weighed similar moves to protest at China's human rights record,” Reuters reported.
Canada, Lithuania, and Scotland have also announced their officials will not be attending the games in protest of China’s human rights record, while New Zealand said its officials won’t attend “due to Covid concerns.” Japan is also considering a boycott, but South Korea has said it is not discussing any similar plans at this time.
For CNN’s update, White House announces US diplomatic boycott of 2022 Winter Olympics in Beijing, click here. For the rest of Reuters’ report, Australia, UK join diplomatic boycott of Beijing Winter Games, click here.
UK pro-Beijing activists offer £10,000 on social media for the addresses of Hong Kong activists in Britain
The Telegraph has reported that "[p]ro-Beijing activists are offering £10,000 on social media for the addresses of …Simon Cheng, a previous Hong Kong British consulate employee who claims he was tortured by the regime in 2019, as weel as Nathan Law, a leader of the territory’s ‘Umbrella’ protests.”
The Telegraph:
The message, posted to more than 270 group members, was followed by a photograph of Mr Cheng and Mr Law at the Palace of Westminster with MPs including Stephen Kinnock.
…Further WeChat messages talk about building a team to attack Hong Kong independence campaigners in the UK more generally.
Reporters also said that the "threats follow an incident in Chinatown in London … where a rally and a counter-demonstration between opposing groups of Chinese emigres descended into a brawl." The rally was held by supporters of the “Stop Anti-Asian Hate” campaign who fought with Hong Kong independence activists. “Critics have accused Beijing of infiltrating parts of the anti-racism movement in an attempt to conflate opposition to the regime with discrimination of people of Chinese heritage more generally,” the Telegraph noted.
For the rest of The Telegraph’s story, ‘Anonymous boss’ offering £10,000 bounty threatens exiled Hong Kong freedom fighters, click here.
Federal Court gives approval for Microsoft to seize Chinese hackers’ websites
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