Evergrande's default is emblematic of the systemic problems Chinese real estate groups are facing. For many years, the real estate boom fueled both the country's credit and construction industries. But now the group's shares are falling to their lowest level in six years. Fears of a domino effect are running high.
By Ning Wang
We explain China’s taxpayer credit rating system, including how it works and why it is important for foreign enterprises based in the country and doing business in China. Taxpayer credit rating is becoming increasingly important for foreign enterprises operating in China as its government – at all levels – is working continuously to improve the country’s social credit system.
By Redaktion Table
When it comes to China's stock markets, there is often talk of a bloodbath. However, it was mainly Chinese internet companies that went downhill while producers of solar cells, wind power and electric cars are experiencing a boom.
By Redaktion Table
China's finances are of global importance. The People's Republic's monetary and debt policies have an impact on all nations. Table.Media's editorial team has all the latest news on China's finances.
China is not only the most populous country in the world with over 1.4 billion inhabitants, but also the second largest economic power in the world. In terms of gross domestic product, China ranks second behind the U.S. with $14.7 trillion in 2020, $20.9 trillion. Experts believe that China could replace the U.S. as the largest economic power by 2028 at the latest. For several decades, the Chinese government led by President Xi Jinping and the state banks have financed a rapid growth policy with generous lending. Even during the corona pandemic, China's economy grew by 2.27 percent (2020) and 5.82 percent (2019), respectively.
China's debt level is growing. During the coronavirus crisis in 2020, the debt-to-GDP ratio climbed to 46 percent. While that doesn't sound like much - in Germany, it's about 70 percent - the financial system is structured differently in China. For example, the CP China can also order state-owned enterprises to take on higher debt. Total debt, which includes corporate debt, is 277 percent. In China, lavish bank debts of 30 percent of GDP must also be taken into account. However, there are two major differences compared to other countries. First, countries like the U.S. are largely indebted to foreign countries - including China. This makes the U.S. dependent on the development of world economy. The People's Republic is not. China has very strict capital controls also. Investors cannot easily withdraw their money and move it abroad.
Another peculiarity in China is the municipal fiscal policy. In developing the provinces, the Communist Party in Beijing relies on the work of local governments. Although they have no taxing authority, they still have to finance the construction of infrastructure. Local Government Financing Vehicles (LGFV) were established to increase the financial envelope, bypassing the low credit limit. However, the loans taken out through LGFVs are not officially recorded. Estimates by the consulting firm Standards & Poors put the total amount of "hidden debt" at five trillion U.S. dollars. The State Council of the People's Republic of China has stated that the system will be restructured. LGFVs that cannot repay their debts are to go bankrupt in the process.
The world's four largest banks are all based in China. With total assets of $4.9 trillion, China Industrial and Commercial Bank (ICBC) is the largest. It is followed by China Construction Bank ($4.2 trillion), Agricultural Bank of China ($4 trillion) and Bank of China ($3.6 trillion). The main reason for the enormous balance sheet totals is the loose lending policies in the People's Republic, which were used to finance the country's growth. The bankruptcy of Evergrande or the bankruptcy of Bashing Bank are evidence that there are also some bad loans behind the enormous sums. In the late 1980s, the world's biggest banks came from Japan until the financial system there collapsed. In the early 2000s, the biggest banks came from the U.S. until the subprime crisis caused an economic collapse in 2008. Unlike in other countries, in China the question of financial policy is increasingly also a question of domestic politics, since foreign investors and financiers do not play such a large role. President Xi Jinping must nevertheless ensure that investments in China are not perceived as a risk.
The largest stock exchange in China is the Shanghai Stock Exchange (SSE). It is located in the Pudong Special Economic Zone and was founded in 1990. There is also the Shenzhen Stock Exchange. Not unlike the Nasdaq, it mainly trades technology and private companies. The third stock exchange to be counted as part of China is the Hong Kong Stock Exchange in the Special Administrative Region of the same name. However, the most important of the three stock exchanges in China is the Shanghai Stock Exchange (SSE). Well over 4,000 stocks are traded here. The SSE is under the control of the China Securities Regulatory Commission (CSRC). Stock trading has a long tradition in China. In the 1930s, Shanghai was the most important financial center in the Far East. However, this practice was discontinued when Mao Zedong came to power. It was only reintroduced with Deng Xiaoping as head of state.
Strict foreign exchange laws apply in China. For example, since 2017, cash transfers of more than 50,000 yuan (approximately 6,600 euros) must be reported to the central bank. The purchase of assets abroad with Chinese foreign currency is also severely restricted. However, the Pandora Papers list some 2,000 well-known and wealthy Chinese, some of them very high-ranking, who use shell companies abroad to circumvent the regulations on foreign exchange. Through shell companies on Cayman Island, Bermuda or Cyprus, these Chinese disguise the outflow of foreign exchange abroad. These companies also solicit investments from foreign donors. Officially, they are not allowed to invest in Chinese Internet and tech companies. The money then goes to the shell company and on to the Chinese owner. These constructs are called Variable Interest Entity (VIE). American venture capitalists have been able to invest in Alibaba, Baidu, Tencent and Bytedance in this way. Through shell companies in offshore financial centers, Chinese companies can also go public abroad. This is a common practice that the Communist Party tacitly accepted for a long time. Since the fall of 2021, however, the authorities have been working on a new amendment to the law.
China is the world's largest market for green finance. That is, for green bonds. In summer 2020, the total portfolio amounted to 1.4 trillion euros. In the first quarter of 2021 alone, Chinese banks, developers, power generators and rail operators collected a total of $13.2 billion. The problem is that green finance requirements in China have so far not been nearly as stringent as in the rest of the world. For example, green bonds in China may also be used to finance coal-fired power and oil production. But that is about to change. The central bank, the Development and Reform Commission and the Securities Regulation Commission announced in the summer of 2021 that China wanted to adapt to international green finance standards. In the future, green bonds may no longer be invested in fossil fuels.
The E-Yuan is soon to become state-owned digital currency in China. The currency is officially called Digital Currency Electronic Payment (DCEP) and is currently being tested in practice by the Chinese central bank. The currency will enter circulation by the central bank passing the e-yuan to commercial banks, which will pass it on to customers. In the form of non-interest bearing virtual e-wallets. The currency cannot be saved, as the E-Yuan has an expiration date. The E-Yuan is seen as a response to the rising market shares of WeChat Pay (Tencent) and Alipay (Alibaba). This is because the Beijing government has no control over these payments. Moreover, consumers' habits are no longer traceable. But the government wants to know how much people spend on housing, food, luxury and travel. With the E-Yuan, this data is collected centrally. This is intended to push cash even further into the background.
Loans play an important role in China's geopolitics. The government of the People's Republic and its state banks extend loans to other states primarily to secure their political support. Many of the loan agreements contain clauses whereby the loans become due if the Communist Party no longer agrees with the policies of the debtor state. In addition, Chinese loan agreements are often subject to strict secrecy. But this makes it impossible for other potential creditors to assess the creditworthiness of a state that already has loans from China. Also unusual is that debts owed to the People's Republic cannot be rescheduled. These were the findings of a team of scholars from the U.S. Niddatal Research Center for Development Finance, the Washington-based think tank Center for Global Development, the Kiel Institute for the World Economy and the Peterson Institute for International Economics. As part of the New Silk Road, China is primarily tying up resource-rich countries in Africa through loans. The economic benefit for the country is mostly small, because the infrastructure measures are carried out by Chinese companies with Chinese labor and Chinese raw materials.
China's finances have global implications. A crisis in the People's Republic could lead to massive economic collapses all over the world. If too many loans default in the heavily indebted country, it could send shockwaves to all economies. Xi Jinping's generous growth policies have led to shaky constructs, as the Evergrande bankruptcy shows. The news on finances in China from Table.Media's editorial team provides all the important info on the subject.
