1 Beijing’s mortgage rate tweaks fail to stem tide of early repayments
Banks take initiative in reducing mortgage loan interest rates
Sept. 25
Mainland media reported that many Chinese banks have issued implementation rules regarding a policy adjustment by the People’s Bank of China and the National Administration of Financial Regulation on Aug. 31 (effective Sept. 25) that allowed individuals who meet conditions to apply to banks for a reduction in their interest rate on existing first home mortgages. According to media reports, the banks would proactively make adjustments to the interest rate of their customers with a first home mortgage, with no action required from the customers.
Mainland media noted that banks mostly made cuts for first-time mortgage borrowers with floating rates linked to the central bank’s loan prime rate by an average of 0.8 percentage points. Also, with the exception of first-tier cities:
- Mortgage interest rate signed before May 2022 will be limited at the LPR, while mortgage interest rate obtained after May 2022 to the present will be capped at minus 20 basis points below the LPR.
- The 5-year LPR was 4.60 percent in April 2022, dropped to 4.45 percent in May 2022, and was 4.20 percent from June 2023 to the present.
Mainland media reported bank customers with mortgages as saying that they would still consider making early repayments on their loans even after the interest rate adjustment. Credit department employees of a bank in Beijing also said that there are queues of people making early repayments, with the lines thinning out just a little recently.
Previously, Chinese banks required customers to apply online three months in advance to make early loan repayments. However, the waiting time for early repayments shortened to just one month from July 2023.
Mortgage loans to business loans?
Sept. 19
Mainland media Securities Times reported that financial intermediaries have been stepping up efforts to convert mortgages into business loans (i.e. loan fraud, or misuse of loan violation) as major banks implement mortgage interest rate adjustments. People then use the “business loans” they obtain to pay off their home loans.
Securities Times noted that most existing mortgage loans signed after 2019 can be reduced to a minimum of 4.2 percent. However, the annualized interest rate of business loans have fallen to between 3 percent to 3.2 percent, or an interest rate differential of 1.2 percent to 1.75 percent from adjusted mortgage interest rates. Securities Times added that the interest rate spread is even wider for buyers of second homes with higher mortgage rates.
When an employee of a financial intermediary converting mortgages to business loans was asked by Securities Times whether they feared being found out, the employee replied that the banks are too keen on having people take out loans and cannot be bothered to investigate fraud.
Securities Times cited an accounts manager of a bank in Shenzhen as saying that 70 percent of the business loans his branch issues each month were used to pay off existing mortgage loans. Meanwhile, the head office of a small and medium-sized bank in Guangdong Province said that more than 70 percent of the personal business loans issued by the bank had been used to repay mortgages.
10 provincial capitals relax purchase restrictions
Sept. 26
Mainland media Yicai reported that Tianjin, Shenyang, Nanjing, Dalian, Qingdao, Jinan, Suzhou, Fuzhou, Zhengzhou, Hefei, Xiamen, Wuxi, Wuhan, Guangzhou, Xi’an, and other Chinese cities—10 of which were provincial capitals—had either canceled or adjusted and relaxed their housing purchase restriction policies as of Sept. 25, 2023.
With the exception of Tianjin, Suzhou, Guangzhou, Xiamen, and Xi’an, the above cities still retained housing purchase restrictions in certain areas or under certain conditions. Other cities have scrapped purchase restrictions across the board, including the removal of price floors in Chengdu and Yan’an.
Fewer marriages
Sept. 15
Data released by the Ministry of Civil Affairs for the second quarter of 2023 found that there were just 1.781 million newly registered marriages in China from April to June this year, or 366,000 fewer as compared to the first quarter. In total, there were 3.928 million newly registered marriages for the first half of the year.
The Chinese edition of Voice of America noted that if the proportion of newly registered marriages for the first half of the year were replicated in the second half, then the total number of marriages in China for all of 2023 would be less than two-thirds of a decade ago.
Property oversupply
Sept. 23
Official mainland media China News Service released a video of He Keng, a deputy director of the Financial and Economic Committee of the 11th National People’s Congress and former deputy director of the National Bureau of Statistics, talking about China’s real estate market and developers at the 2023 China Real Economy Development Conference in held in Dongguan City, Guangdong Province.
He said, “How many vacant houses are there now? Each expert gives very different figures. In the most extreme cases, it is believed that there are enough vacant houses to accommodate 3 billion people. This estimate may be a bit much, but 1.4 billion people may not be able to occupy [all the vacant houses currently available in China].”
Our take
1. In view of the policies that CCP authorities have rolled out to date to rescue the real estate sector, it seems that Beijing is running out of options and what it is currently trying is having very little effect.
First, the “recognize property, not the mortgage” (認房不認貸) policy introduced near the end of August has barely moved the needle in boosting property sales. For instance, Hefu Research Institute found that the property transaction volume growth rate in Guangzhou City in the first three weeks since the policy was implemented was 15 percent, 6 percent, and negative 6 percent respectively. We believe that the “recognize property, not the mortgage” policy is about as far as Beijing can go in relaxing property restrictions without breaching its own “houses are for living in, not speculation” framework. But if property transactions remain sluggish, Beijing will be hard-pressed to abandon the framework as it seeks more effective means of stimulus.
The fact that many localities are rapidly relaxing their real estate policies also underscores the weakness of China’s property sector and the ineffectiveness of the central government’s rescue measures. Notably, while all four major first-tier cities in China (Beijing, Shanghai, Guangzhou, and Shenzhen) adopted the “recognize property, not the mortgage” policy by the end of August and at the beginning of September, Guangzhou took the lead in scrapping property purchase restrictions in some areas on Sept. 20. Guangzhou would become the city with the lowest home purchase threshold and cost among the first-tier cities. And with the exception of a few key cities, many other cities (including provincial capitals) moved to relax property purchase restrictions.
Second, Beijing’s move to lower deposit interest rates, and later, mortgage interest rates for first home buyers, appears to be intensifying China’s “balance-sheet recession.” The Chinese people are more inclined to pay off their loans early so as to reduce their debt and expenses given the current economic downturn. People also do not want to be holding on to a lot of debt in the present investment environment where returns are low and risks are high. The poor economic and financial situation in China is partly a reason why people are willing to risk engaging in loan fraud by converting mortgages into business loans.
2. Economic and financial woes aside, the CCP authorities must address the issues of property oversupply, a shrinking demographic, and reduced incomes in coming up with effective policies to stimulate the real estate sector. Otherwise, China’s real estate sector will continue to spiral downward, and declining property prices are far from bottoming out.
China’s real estate sector problems will in turn worsen the “balance-sheet recession” and impose a growing drag on the Chinese economy. Falling RMB asset prices will also put pressure on the currency exchange rate and drive capital outflows, creating yet another vicious cycle that impacts the economy.
2 Sino-US competition deepens despite greater engagement
Cooperation
Sept. 22
The U.S. Treasury Department announced the creation of economic and financial working groups with the PRC. The working groups will “provide ongoing structured channels for frank and substantive discussions on economic and financial policy matters, as well as an exchange of information on macroeconomic and financial developments,” according to a statement by the Treasury.
Treasury Secretary Janet Yellen said, “These working groups will serve as important forums to communicate America’s interests and concerns; promote a healthy economic competition between our two countries with a level playing field for American workers and businesses; and advance cooperation on global challenges.”
Sept. 25
U.S. Space Force Commander General Chance Saltzman told Reuters that the Space Force has had internal discussions about establishing a hotline with the PRC to avert crises in space.
Saltzman added that the U.S. has not yet engaged with the PRC to establish such a hotline, and that it would be up to President Joe Biden and the State Department to take the lead on such discussions.
Competition
Sept. 22
The U.S. Commerce Department issued final rules to prevent countries deemed to pose national security concerns, including the PRC, from accessing semiconductor manufacturing subsidies under the CHIPS and Science Act.
Sept. 23
Reuters reported that the Biden administration is in talks with Vietnam about an arms transfer agreement, citing two people familiar with the deal. The deal could see the U.S. sell a fleet of F-16 fighter jets to Vietnam, and would be the largest arm transfer arrangement in history between the two countries. Washington is also weighing “structuring special financing terms for the pricey equipment that could help cash-strapped Hanoi steer away from its traditional reliance on lower-cost, Russian-made arms.”
The deal is in the early stages and could come together within the next year, although there is still a chance that it may not materialize. The deal was also a key topic of discussion between Vietnamese and U.S. officials in Hanoi, New York, and Washington in September 2023.
Sept. 25
1. President Biden met with Pacific Island leaders at the White House for a second summit in just over a year. At a welcoming ceremony, Biden said that the U.S. is “committed to ensuring an Indo-Pacific region that is free, open, prosperous, and secure.”
Biden pledged to work with Congress to provide $200 million more in funding to projects in the region. Biden also announced U.S. diplomatic recognition of Cook Islands and Niue.
2. The U.S. Commerce Department added 28 companies to a trade blacklist, including 11 Chinese companies. Nine of the companies, including a Chinese company and a Russian company, allegedly supplied components to make drones that were deemed to be used in Moscow’s war effort in Ukraine. Another six Chinese companies allegedly procured aerospace parts for the Iran Aircraft Manufacturing Company that are used to make drones deployed by Iran to attack oil tankers in the Middle East and by Russia in Ukraine.
Sept. 26
1. The U.S. Department of Homeland Security designated three Chinese companies as part of an effort to eliminate products made with forced labor of Uyghurs from the supply chain. The three companies are Xinjiang Tianmian Foundation Textile Co Ltd, Xinjiang Tianshan Wool Textile Co. Ltd, and Xinjiang Zhongtai Group Co. Ltd.
2. The State Department urged businesses like due-diligence firms and professional services companies to weigh the risks of operating in China in an addendum to its Xinjiang supply chain business advisory.
Falling business confidence
Sept. 19
An annual survey by the American Chamber of Commerce in Shanghai found that just 52 percent of 325 members polled were optimistic about their five-year China business outlook. This was the lowest level of optimism since the AmCham Shanghai Annual China Business Report was published in 1999.
The report also found that tensions between major concerns were a concern for many companies, with Sino-U.S. tensions being chosen as the top business challenge by 60 percent of the 325 respondents.
Hardening battle lines?
Sept. 13
Secretary of State Antony Blinken delivered a speech titled “The Power and Purpose of American Diplomacy in a New Era” at the Johns Hopkins School of Advanced International Studies.
Noteworthy parts of his speech pertaining to the PRC include:
- “Decades of relative geopolitical stability have given way to an intensifying competition with authoritarian powers, revisionist powers … the People’s Republic of China poses the most significant long-term challenge because it not only aspires to reshape the international order, it increasingly has the economic, the diplomatic, the military, the technological power to do just that. And Beijing and Moscow are working together to make the world safe for autocracy through their ‘no limits partnership.’”
- “When I set out the administration’s ‘invest, align, and compete’ strategy toward China last year, we pledged to act with our network of allies and partners in common purpose. By any objective measure, we are now more aligned, and acting in more coordinated ways, than ever before … That allows us to manage our competition with China from a position of strength, while taking advantage of open channels of communication to speak clearly, credibly, and with a chorus of friends about our concerns; demonstrating our commitment to cooperate on issues that matter most to us in the world; and minimizing the risk of miscalculation that could lead to conflict.”
- “When we strengthen international institutions … we build a broader coalition of citizens and countries who see the international order as something that improves their lives in real ways and deserves to be upheld and defended … So when the Beijings and Moscows of the world try to rewrite – or rip down – the pillars of the multilateral system; when they falsely claim that the order exists merely to advance the interests of the West at the expense of the rest – a growing global chorus of nations and people will say, and stand up to say: No, the system you are trying to change is our system; it serves our interests.”
- “We must act, and act decisively … We must put our hand on the rudder of history and chart a path forward, guided by the things that are certain even in uncertain times – our principles, our partners, our vision for where we want to go – so that, when the fog lifts, the world that emerges tilts toward freedom, toward peace, toward an international community capable of rising to the challenges of its time.”
Sept. 19
President Biden made the following remarks about the PRC in his speech to the 78th session of the United Nations General Assembly:
- “When it comes to China, I want to be clear and consistent. We seek to responsibly manage the competition between our countries so it does not tip into conflict. I’ve said, ‘We are for de-risking, not decoupling with China.’”
- “We will push back on aggression and intimidation and defend the rules of the road, from freedom of navigation to overflight to a level economic playing field that have helped safeguard security and prosperity for decades … But we also stand ready to work together with China on issues where progress hinges on our common efforts.”
Our take
The Biden administration has telegraphed through its recent remarks and moves that it is preparing the U.S. and its allies to fight and win a “new cold war” against the PRC and Russia. To that end, Washington appears to have adopted a modified “containment” strategy, including denying the PRC access to advanced American technology, securing and moving supply chains outside China, strengthening diplomatic ties in the Indo-Pacific region, and arming the PRC’s neighbors. And as we observed in an earlier newsletter, the Biden administration could be taking advantage of the PRC’s mounting domestic and external crises to compel behavioral or leadership change from the CCP regime.
The Biden administration could move more aggressively to pressure the Xi leadership sooner rather than later. We previously noted that “Sino-U.S. relations could take a turn for the worse depending on how the Russia-Ukraine conflict develops.” Recent developments suggest that things are not going well for Ukraine.
- In a Sept. 21, 2023 article titled “Ukraine faces a long war. A change of course is needed,” The Economist noted that the Ukrainian counteroffensive that began in June has “confounded expectations,” with Ukraine liberating “less than 0.25 percent of the territory that Russia occupied in June.” The Economist further observed that both “Ukraine and its Western supporters are coming to realize that this will be a grinding war of attrition … Instead of aiming to ‘win’ and then rebuild, the goal should be to ensure that Ukraine has the staying power to wage a long war.”
- American investigative journalist Seymour Hersh wrote in a Sept. 21 piece on Substack, “The reality is that Volodymyr Zelensky’s battered army no longer has any chance of a victory.” An intelligence source who “spent the early years of his career working against Soviet aggression and spying” and has access to “current intelligence” told Hersh that reports of the Ukrainian counteroffensive making slow but steady progress are “all lies. The source added, “The war is over. Russia has won. There is no Ukrainian offensive anymore, but the White House and the American media have to keep the lie going.” Hersh also wrote that Biden “has turned his unrelenting financial and moral support for the Ukraine war into a do-or-die issue for his re-election.”
President Biden’s need for political results at home and the Biden administration’s broader geopolitical considerations could lead to heightened Sino-U.S. tensions (even as the administration pursues “intense diplomacy”) during the remainder of 2023 and in the lead up to the 2024 presidential elections. A worsening of Xi Jinping’s domestic and political situation could also raise the probability of rising Sino-U.S. tensions should the Biden administration decide to capitalize on the PRC’s predicament. Deteriorating Sino-U.S. relations would in turn add to Xi’s political problems, and increase the odds of political Black Swans emerging in China.