Letter from the Editor

China has seen this week a series of high-profile financial defaults and restructurings from some of its most prominent conglomerates.

It accentuates the following trends that we observed since the Baoshang Bank bankruptcy in 2020:

1. The Chinese government will no longer provide the subtle credit guarantee to corporates, state-owned or private. The debt guarantees over the past decades have successfully helped China avoid systemic financial risks. However, the credit guarantee by the government is no longer sustainable. China has made clear to normalize the use of bankruptcy laws in the country. More bankruptcies, especially in certain highly leveraged market sectors, will continue to surface. Without normalizing bankruptcy laws and procedures, financial reforms cannot deepen. This is a part of the major market economic normalization process.

2. The government will assume local fiduciary responsibilities to oversee the financial restructuring process. Under bankruptcy cases, the provincial government at the corporates’ place of domicile will assume the government responsibility, along with the corporate legal representatives assuming corporate responsibility. 

We covered a couple of months ago the bankruptcy restructuring of Baoshang Bank. The Central Bank has ensured through the restructuring that 100% of individual savings and interest earnings were guaranteed.

3. The real estate sector will continue to face high risks of debt defaults. In 2015 after the Chinese Central Bank lowered interest rates in 6 consecutive rounds, an easy monetary policy allowed real estate companies to borrow aggressively. At the time, many of the loans to real estate companies were in the form of 2+3 or 3+2 years’ terms, which means 2021 will be a heavy debt repayment season. Following the “three red lines” established for the real estate industry last summer, many of the heavily leveraged real estate firms, some of the country’s largest, are unable to secure new loans under the new lending rules. 

Ant Group’s impending restructuring - which should be announced next week - illuminates a different set of potential systemic risks and financial restructuring. Xinhua recently featured an article titled “life crushed by algorithms,” denouncing the dystopian social alienation and the digital divide fueled by the unfettered technology.

Beijing increasingly shows a strong desire to regulate its financial technology and data. Antitrust already enlivened the market this week, highlighting the lawsuit pitching ByteDance against Tencent, two of the country’s largest social media behemoths. 

This week, the Biden administration’s foreign policy towards China has begun to surface in  tiny fractions. In President Biden’s first foreign policy speech, he calls China the “greatest competitor” and Russia the “greatest threat.” The current US administration has taken a solid and persistent position among cabinet members on Taiwan and Xinjiang. However, we still have not yet seen an overarching China grand strategy from the Biden administration on a strategic framework level. Meanwhile, China continues to grow and grow. 7 new subway lines will commence operations in Beijing in 2021, the mayor said. 

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Business

HNA Group Bankruptcy Restructuring

HNA Group had formally entered bankruptcy restructuring. Shares in several of its listed companies fall sharply on Monday, but the impact on bond markets was managed.

HNA Holdings (海航控股), HNA Infrastructure Investment Group (海航基础) & CCOOP Group (供销大集), the three major listed companies of HNA Group, announced on Saturday morning that they will simultaneously enter into the restructuring. More than 60 of their subsidiaries have also filed for bankruptcies.

Nevertheless, the domestic credit market reacted little because most of its bonds have either matured or been suspended from trading. The bankruptcies sent little shock to the bondholders.

HNA Group

Founded in 1993, China’s HNA Group has grown from a single local air transport enterprise to a multinational conglomerate. From 2015 to 2017, HNA Group started its overseas mergers and acquisitions with sufficient domestic funds.

HNA Group has once become the shareholder or controlling shareholder of world-famous enterprises such as Deutsche Bank, the British insurance company, CIT Group, Hilton Hotels, Carlson Hotels, Ingram Micro International, and duty-free retailer Dufry. All of these acquisitions were made through excessive leverages via Chinese banks.

In July 2017, HNA Group was ranked 170th on the Fortune Global 500 list with operating revenue of $53.03 billion, a jump of 183 places in one year.

China cracked down on aggressive overseas expansions with excessive banking leverages.

In June 2017, the China Banking Regulatory Commission (CBRC) ordered banks to examine the systemic risks linked to the aggressive overseas investment by a handful of companies, including Wanda, HNA Group, Fosun, and Zhejiang Lawson. At the end of 2017, HNA Group's liquidity crisis was thoroughly exposed.

In February 2020, Hainan Province, together with relevant departments, set up a joint working group to fully assist HNA Group in defusing risks.

Financials

As of the end of the first half of 2019, HNA Group's total assets stood at $151.81 billion (RMB 980.621 billion), down 8% from the end of 2018, while its total liabilities stood at $109.41 billion (RMB 706.726 billion), with a debt-to-asset ratio of 72.07%.

According to incomplete statistics, the size of outstanding bonds issued under the HNA system is $5.93 billion (RMB 38.289 billion).

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Food Conglomerate Yurun (雨润) Enters Bankruptcy.

On January 29, 2021, the seven core unlisted enterprises of Yurun entered the bankruptcy restructuring process. The audit and evaluation are still in progress, and it is estimated that it may be completed after the Chinese New Year. 

7 core non-listed enterprises of Yurun cover three sectors: food, logistics, and real estate. Listed entity Yurun Food announced on February 1 that only two of its subsidiaries, Nanjing Yurun 南京雨润 and Anhui Furun安徽福润, were involved in the restructuring of Yurun Group. Yet, the recruitment for the restructuring has not started, and no investors have been appointed.

On January 6, Plateau formally submitted an application letter as an overall investor in Yurun Group, proposing a restructuring plan of "industrial capital + financial capital,” including large SOEs, to form a restructuring consortium to resolve the financial risks while keeping the industry in Jiangsu Province.

Yurun Group

Founded in 1993 and headquartered in Nanjing, Yurun Group is a large business group integrating seven major industries, including food, logistics, tourism, commerce, real estate, finance, and construction.

In 2011, the total operating income of Yurun Food was $5.01 billion (HK $32.36 billion), but since then, the performance of Yurun Food has been declining. In 2015, as the founder of Yurun, Zhu Yicai, was placed under residential surveillance by the procuratorate, the group suffered in gathering additional financing resources.  In 2018, the total operating income of Yurun Food was only $1.97 billion (HK $12.75 billion), while the net profit of Yurun Food has been in a loss since 2015.

While Zhu Yicai officially returned to the group in 2019, as a series of adjustments had been made, Yurun Food had already been declared insolvent in the same year.

“The main business of Yurun Group is the food industry. At present, the main business and various operations of its two listed companies remain stable. If the judicial restructuring can be implemented smoothly, the overall debt structure and debt maturity of Yurun Group is expected to be significantly optimized, financial expenses will be significantly reduced, and profitability will be enhanced.” 

(provided by a source close to the Yurun Group)

China Fortune Land Development Debt Default with Possible Bankruptcy Restructuring

On February 1st, listed China Fortune Land Development issued a debt default notice to the market. The current debt default only involves bank loans, trust loans, and other forms of debt, excluding bonds and other debt financing instruments.

This particular batch of default involved the principal and interest of $8.65 billion (RMB 55.9 billion).

On February 1st, China Fortune called the creditors' committee to address the debt issues. Wang Wenxue (王文学), the actual controller of China Fortune, stated that China Fortune's maturing debt would reach RMB 100 billion in 2021.

Hebei government, the Central Bank, and regulatory authorities have stepped in to assist the firm in managing debt holder negotiations and assisting in the debt restructuring process. Still, the possibility of bankruptcy restructuring has not been ruled out yet.

Wang expressed confidence in the creditors to give the company some time, join the China Fortune Debt Committee and act in a unified way.

China Fortune Land Development

Founded in 1998, China Fortune Land Development is a leading operator of new industrial towns in China, a strategy to build satellite towns and cities surrounding the major metropolises. The company has heavily betted on land acquisitions in Hebei, surrounding Beijing.

In September 2020, China Fortune Land Development ranked 53rd in China's 2020 Top 500 Private Enterprises released.

The third-quarter report of 2020 shows that the total debt of China Fortune is about $64.38 billion (RMB 415.9 billion), the net debt ratio is as high as 214%, while its cash to short term debt ratio is 0.41 times.

Since the beginning of 2020, China Fortune's share price has dropped from $4.44 (RMB 28.7) to $1.46 (RMB 9.45), with a total loss in the market value of $11.66 (RMB 75.3 billion).

On January 28th, the Group announced to issue A shares to acquire 33.34% of Tianjin Yuhanyao Graphene Energy Storage Materials Technology (天津玉汉尧石墨烯储能材料科技) to save its share price by investing in New Energy.

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Ant Group Restructuring

Ant Group has made a deal with the Chinese authorities to restructure its business after they halted its $37bn IPO last year, according to insiders. 

More specifically, Ant Group has agreed to become a financial holding company overseen by China’s central bank, thus tightening the capital requirements Ant is subject to. Yet—contrary to investors’ forecasts—Ant will not be forced to spin off any of its major businesses, such as its blockchain and food-delivery operations.

The restructuring plan, which is still under deliberation, could be released formally next week, which is understood to have been received by Vice Premier Liu He.

Consequences

China introduced new rules for financial holding companies last September to control risks in the financial system. Chinese regulators are also scrutinizing the micro-lending businesses. In January, regulators proposed new measures to limit market concentration in the digital payments industry, a business where Ant Group and its rival Tencent are the biggest players.

Furthermore, the new measures for financial holding companies include regulatory requirements on shareholders, management, sources and uses of funding, risk management, and corporate governance and injecting additional capital into financial subsidiaries.

If Ant Group’s restructuring is carried to completion, its revenue and profit growth could be significantly curbed. Ant will also have to raise more capital to meet the new regulatory requirements, and the company’s high valuation—which was based on explosive future growth and the fact that Ant was not a bank—will also be revised downward. Ant has already cut borrowing limits for individual users of its digital lending services, a sign it is downsizing its business to comply with regulations. All Alipay’s savings account services have been de-platformed.

As it is understood, the restructuring includes all Ant’s mobile payment, micro-lending. It is unclear whether the technology components, such as blockchain-technology development, digital-lifestyle services, and artificial intelligence technology—areas that the company had previously identified as its main growth drivers, will be included in the restructuring process. 

Government in Action

China to Complete Undersea Cable Silk Road

China will begin laying the final stretch of fiber optic cables connecting China to Pakistan’s submarine cables in the Indian Ocean and the Mediterranean, thus completing the undersea cable Silk Road.  

The Special Communications Organisation (SCO) – the telecom branch of the Pakistan Army – is about to lay a fiber optic cable between Rawalpindi and the ports of Karachi and Gwadar. The $240 million project is in partnership with Huawei and will connect to the Pakistan East Africa Connecting Europe (PEACE) cable. This last stretch will also provide the Chinese-owned deep seaport of Gwadar with fiber optic connectivity, enhancing its function as a regional transit hub (source).

PEACE Cable

PEACE is privately owned and invested by PEACE CABLE INTERNATIONAL NETWORK CO., LIMITED, a subsidiary of China-based HENG TONG Group and supplied by Huawei Marine.

A consortium of telecom companies from Africa, Pakistan, and Hong Kong led by Hengtong Group – China’s leading fiber-optic maker – is currently installing the PEACE cable. The new infrastructure will drastically reduce the time of data transfer from Europe to China (source).

The northern section of the project linking China to the PEACE cable has already been operational since 2018. The 850km fiber optic cable links southwest China to Rawalpindi and is part of China’s BRI flagship project, the $50 billion China-Pakistan Economic Corridor (CPEC) (source).

As some BRI projects have been slowed down by the Covid-19 pandemic and the ensuing debt crisis, China has stepped up communications and digital infrastructure. The BRI is evolving to place more emphasis on high tech cooperation and digital services. Chinese tech firms are gaining greater access to developing markets when they are being excluded from digital infrastructure projects in North America and some parts of Europe (source).

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Beijing‘s Congressional Sessions Outline Key Developments

This year’s twin congressional sessions in Beijing were conducted partially via video conferencing, empowered entirely by China Mobile's 5G networks.

Highlights in the government work report:

1. Blue Sky Returns.

PM 2.5 enters the “3” range, marking a 53% improvement. The air pollution control in Beijing was included as a case study by the UN Environmental Agency.

2. Economic Scales.

GDP in 2020 broke RMB 3.6 Trillion ( $554 Billion). per capita GDP reached $24,000, comparable to a mid-tier developed economy status.

Beijing aims to add 1 million middle-income population over the 14th Five-Year Plan.

The digital economy represents 38% of the overall economy, topping the nation.

3. Xiong’an - a Thousand-year City - begins full-scale development.

Daxing International Airport has begun operations.

4. Winter Olympic venues are fully completed, accented with Chinese elements.

5. 443 Old neighborhoods have been renovated.

1,843 elevators have been reinstalled in old apartment buildings. Property management services cover 90.9% of residential neighborhoods.

6. 2021 Economic targets

Beijing is expected to grow at 6% in 2021.

7. Beijing envisions an international technology innovation center status.

Beijing will utilize its talent and education strengths to innovate the economy.

AI, Quantum computing, blockchain, biotech will reach the top of the global ladder. IC Integrated industries, new materials, key manufacturing, and machinery technologies are facilitated for major breakthroughs.

推动人工智能、量子信息、区块链、生物技术等优势领域率先占据制高点;聚焦关键核心技术攻关，推动集成电路产研一体、关键新材料、关键零部件和高端仪器设备等方向突破瓶颈，加快实现“换道超车”;

8. High-quality experimentation with system reforms under the “ two zones” national status.

Beijing is the only city that enjoys the reform policies under a Special Trade Zone and a national services economy opening-up comprehensive development zone.

国家服务业扩大开放综合示范区又有自贸试验区政策叠加的城市

9. Construct the model city for the global digital economy

The plan includes 6,000 5G base stations, digital infrastructure based on blockchain, AI data integration and service platforms, satellite internet, industrial IoT, and frontier computing technologies.

10. Beijing becomes a global shopping city.

Duty-free shopping will enter Wangfujing to facilitate duty-free shopping within the city.

11. Improve the distribution of schools and hospitals with the city to improve public health and education services.

12. Universal Studios phase 1 will open in the first half of 2021.

13. Solve the acute issue of housing with government-subsidized apartment development.

50,000 government-subsidized housing will be developed.

14. 7 new subway lines will begin operations in 2021.

15. Beijing builds the cultural “golden name cards” with “three mountains and five gardens” (三山五园）
    The three mountains: Frangrance Hill, Wanshou Mountain, Yuquan Moutain
    Five gardens: Summer Palace, Old Summer Palace, Jingming Garden, Jing Yi Garden, and Changchun Garden.

Monetary Policy

Central Bank Steadily Retracts Liquidity Injection over Holiday

The liquidity Central Bank released to the market via reverse repo agreements steadily declined from $3.11 billion (RMB 20 billion) to $1.56 billion (RMB 10 billion), further to $780 million (RMB 5 billion) between January 3-12.

On January 13-18, the central bank further reduced liquidity release via reverse repo to $310 million (RMB 2 billion), the lowest level in nearly 10 years.

For the remainder of January, liquidity release has largely remained at this low level, with occasional spikes.

Monetary policy guidance

1. The Central Bank’s policy guidance has been clear: monetary policy will ensure reasonable and sufficient liquidity(流动性合理充裕）, but won’t be overly expansive for 2021, to reflect the economic recovery.

The stock market is partially overheated, and there are concerns about a bubble. Regulation has also taken a stand, and liquidity has indeed tightened. The broader context of this wave of the reduced scale of liquidity release should spill over to policy rates. 

2. Monetary policy will use a broader basket of flexible market-based tools to drive down effective interest rates. Monetary policy won’t make a directional change.

“The current monetary policy puts financial stability as the primary goal, DR007 will still be the most important indicator of short-end liquidity. After the Spring Festival, DR007 has a high probability of maintaining 2.2% central wide oscillation.”- according to Zheshang Securities. 

预计春节期间，货币政策将践行“不急转弯.”

The Central Bank began operations to support commercial banks to issue perpetual bonds to replenish capital through Central Bank’s debt swaps. The support is especially crucial for smaller commercial banks.

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Technology

China Masters 3rd Generation Nuclear Power Technology

China’s first Hualong One third-generation pressurized water nuclear reactor went online for commercial operation on Saturday. It makes China only the 4th country to master third-generation nuclear-technology after the US, France, and Russia with 90% of the equipment used, produced domestically, including all elements of the core components.

Construction of the reactor in Fujian began in 2015, and it will have a lifespan of 60 years. A second unit at the same site is set to be completed this year, with a further seven units under construction across the country (source).

China is currently the third-largest producer of nuclear energy, following the US and France, with 51 gigawatts of capacity last year. The country is expected to rapidly increase its nuclear-capacity to meet its commitment to a peak in carbon emissions by 2030 (source).

Vice-president of the CNEA, Chen Hua, said that by 2025, China expected to have 70GW of nuclear power capacity in operation with 40GW currently under construction. The country also recently began constructing its first reactor involving private capital creating a mixed-ownership model in nuclear power. (source).

The nuclear energy sector is a priority under China’s “Made in China 2025”. A recent report by the China Nuclear Energy Association (CNEA) stated all major nuclear power companies are participating in the strategy and are actively looking to overseas markets. Analysts believe that the successful commercial use of the Hualong One reactor will help the country export its domestically-developed third-generation design to other countries, especially those involved in the Belt and Road initiative (source).

According to CNEA, 28 countries plan to develop nuclear power along the Belt and Road initiative making it a potentially major export (source). Currently, two Hualong One units are under construction in Pakistan, whilst China General Nuclear (CGN) has proposed to use a version of the Hualong One in Essex (UK) (source).

Bytedance Sues Tencent on Antitrust Grounds for 90M RMB

TikTok’s owner filed a lawsuit against its social media competitor Tencent, citing TikTok has been de-platformed by Tencent’s WeChat since 2018, at the Beijing IP Protection Court. TikTok’s competitors, invested by Tencent, are free to stream on Wechat platforms.

Bytedance sues Tencent for 90M RMB compensation at the Beijing court.

This is the first lawsuit filed by one of China’s largest digital companies against another. This shows the competitive landscape within China’s digital space. The western notion that all Chinese companies are a part of China. Inc is not so true.

This lawsuit is also encouraged by China’s recent launch of antitrust regulations against some of the data abuse by China’s internet giants. TikTok’s lawsuit is filed precisely on antitrust grounds, against the monopolistic nature of WeChat to control China’s largest social media platform and its data flow.

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