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China Update | 16 November 2021

The following is the video transcript for 'China Update' published 16 November 2021. It contains material quoted from other sources.

China Property Crisis | Evergrande

The Chinese Property Market is feeling the pain:

According the latest data published on Monday, the number of cities where new home prices recorded monthly increases fell for the fifth month in a row from 27 to 13 in September, while the number of cities where prices of second-hand houses increased fell to only four.

The 0.2% drop in new home prices in October was the biggest fall seen in China since February 2015. It was in 2015 when China saw its last property crisis, in the end with that crisis, Beijing ended up turning to cheap credit and stimulus.

In a country where the property sector contributes 25 to 30% of economic growth, this slowdown will be hitting many regions very hard. Local governments will be very tempted to either 1) pump up local property developers or 2) pour money into unneeded infrastructure.

In fact, Chinese financial media over the weekend reported that twenty-one Chinese cities have recently issued policies to “stem declines in residential property prices”

For example, the massive city of Wuhan, just dropped strict requirements on non-residents buying houses there.

We know that land sales, that is sales of the right to use land for a period of time, represents the biggest source of income for local governments. One question asked when the crackdown on private property developers started was: how will local governments replace falling revenue.

Well.. According to new data, over the past three months state-owned developers have bought three-quarters of residential land sold at auctions by value. In the past this rate was only 45 per cent of land sold at auctions. So, there is our answer.

Moving from local government to central government.

We already know from last Friday’s episode that there is strong evidence to suggest that Beijing, that is the central government, has already blinked and has starting to ease growth constraints in the property sector, in order to hit politically acceptable growth levels in 2022. Investors seem to think so too, with property stocks seeing the largest two day price increase in five years late last week.

Now we have been following Evergrande with every episode, but for those of you who have not watched the last few episodes, this is what you need to know:

Last week, Evergrande, avoided defaulting on overdue interest payments of $148m. Although there is some dispute around this payment.

Just days before this payment it sold its 5.7% stake in media firm HengTen Networks Group for $145m.

A few days before that it sold its UK-based electric cat business. We don’t know for how much.

Evergrande still facing challenges meeting its financial obligations, with 100s of millions more in payments due by the end of the year.

Of course, other Chinese property developers are liquidity issues too. We have been following Kaisa group and others on here.

Outbreak Update

Dozens of cities across the country remain under varying forms of lockdown, as the current now month long Delta outbreak as still not been stamped out.

Though it has not expanded to a national crisis level, dozens of new cases are discovered in different locations each day, and millions are effected by the costly restrictions as China still pursues a zero-cases strategy. The tally of local cases officially reported since Oct. 17 is nearing 1500.

One piece of good news, is that most new cases are now concentrated in one region, the north-eastern city of Dalian city. Neighbouring cities are now quarantining arrivals from Dalian for 14 days before allowing them to move around freely.

In Dalian, Schools have been closed, and almost one million people, about one eighth of the entire population, are now confined to their homes. One university is also in complete lockdown.

The city of Beijing is getting stricter too. Starting from tomorrow, most domestic travellers into Beijing will need to present a negative Covid test as well as a green health code — a type of domestic COVID passport – in order to enter the city.

US-China: Biden-Xi Meeting

On Monday US time, GS Xi Jinping and US President Joe Biden had their third conversation in 10 months. The two sides met virtually for about three and a half hours.

U.S. officials told US media that the talks were “meant to reassure both sides that misunderstandings would not lead to unintended clashes.” The White House readout expressed that both sides have disagreements over issues, like “the Taiwan situation, the militarization of the South China Sea and cybersecurity.”

The Chinese foreign Ministry described the exchange as a “candid, in-depth and thorough discussion” on “strategic issues affecting the future of bilateral relations as well as important issues of mutual interest and concern.”

Standard language employed here, but still constructive.

During the meeting, Xi called Biden “my old friend” and said the two countries should work together.

So far state media has adopted causally optimistic language in its coverage of the meeting, with the phrase “build consensus” appearing frequently.

My analysis would be that the best thing to expect from a successful exchange here is the setting up of guardrails to prevent unintended serious escalations in the future, and perhaps some limited cooperation on things like climate policy.

But that’s it, do not expect any general warming of relations. Both sides distrust each other and see the relationship as one defined as in competition.

China Beijing Equity Exchange Opens

On Monday, the Beijing Equity Exchange officially opened. The new exchange is the third in mainland China and is intended as a platform to house small and medium-sized companies that have long faced difficulty raising capital because they are not big enough to list in Shanghai of Shenzhen.

With a 200 million RMB (31 million USD) cap requirement, the Beijing exchange intends to provide easier access to listings than Shanghai’s Nasdaq-style Star board.

With the Monday launch, 71 companies migrated from existing Chinese boards and 10 companies listed for the first time. This is just a fraction of the number of companies listed in Shanghai or Shenzhen.

However, it does represent another step forward in Beijing’s attempts to expand capital markets and pull the balance of power in global capital markets closer to its side of the Pacific ocean.

Sixth Plenum: ‘Whole Process Democracy’

Over the last few months we have seen and discussed what looks like the beginnings of a new global PR campaign that Beijing wants to push to challenge the definition of democracy.

Specifically it wants to present what the party argues is an alternative form of democracy, which Beijing calls “whole process democracy”. The idea to be pushed internationally is not only is this so-called “whole process democracy” is a legitimate form of democracy, but it is superior to Western or US-style democracy.

Indeed, this is what China expert and former Australian Prime Minister Kevin Rudd wrote in a WSJ opinion yesterday:

“It offers the developing world a new model that China believes works, as opposed to the democratic world’s model that it says doesn’t—as demonstrated by what China argues is its superior response to Covid-19. It boasts of the Marxist basis of that model.”

Last week Beijing hosted the critical sixth plenum, which we discussed in the last two episodes. At a special press conference after the plenum, top leaders spoke on four day event. And this idea of “whole process democracy” and its superiority over Western democracy once again come up.

The director of the Policy Research Office of the Communist Party of China Central Committee, a senior ideology official, expressed “The US will host a so-called democracy summit and seeks to revive Western democracy, and it’s a huge irony to host it against the mounting problems faced by Western democracy.”

He went on to say:

“Democracy is not a patent of the West, nor can it be defined by the West. Western democracy is a democracy dominated by capital, a democracy of the rich, not true democracy.”

This of course, is not a new critique of, what could be called “Anglo-Liberal Democracy” or Anglo-Capitalist Democracy”. Marxists, fascists, anarchists, and others have made similar criticisms for almost two centuries, becoming especially mainstream in the west in the 1930s, 1960s, and perhaps again today.

The official moved onto, what the party argues, is the superior strength of Chinese “whole process democracy” expressing

“Democracy is not for decoration, but for solving people's problems.” And concluded with:

“The Chinese people have a high degree of confidence in their political system, and the fundamental reason lies in the fact that whole-process people's democracy is highly democratic, fully fledged and deeply welcomed by the Chinese people. This is true people's democracy.”

This sort of rhetoric is common domestically. But it increasingly looks like Beijing is preparing to aggressively push this PR campaign globally in the near future.

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