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China Economy: Volvo’s Safety Reputation is Challenged Due to Massive Recalls

China Economy recently reported that China-owned Swedish automobile manufacturer Volvo issued multiple recalls for a total of 380,000 cars in the Chinese domestic market in the last month alone. Volvo ranked number one on the recall list in August in China. Volvo made its name in the Chinese market for its quality and safety. However, numerous design mistakes and manufacturing issues caused multiple large-scale recalls and have been eating into the brand’s reputation. Volvo has recalled over half a million cars this year in China. The latest batch of recalls in September impacted 135,316 cars, which is greater than all the recalls issued in the past four years (2016-2019) combined. As the inventor of the safety belt, Volvo’s recent global safety belt recall of 2.2 million cars added to the crisis, as it was the largest recall in the company’s history since its founding in 1927. Chinese multinational automotive company Geely Holding Group acquired Volvo from Ford in 2010.

Source: China Economy, September 8, 2020

China Moves to Discipline Local Financing Platforms

China’s financial regulatory authority recently issued a document imposing strict restrictions on the products and services that can be provided by the locally established financing platform – the financial asset exchanges (FAE). The move may deal a blow to real estate companies and urban investment companies that have resorted to these exchanges as a financing channel in recent years.

The financial asset exchange is a financial asset trading service platform set up with the approval from local governments (provincial and municipal governments).

According to a Reuters report, this document forbids local FAE’s from cooperating with e-financing and real estate companies that are subject to state regulatory restrictions. It also obliges FAE’s to stop providing passages for financial or non-financial institutions to circumvent regulatory requirements such as the scope of investment and leverage constraints.

The document also pointed out that the local FAE’s are not allowed to sell products, in any fashion, to individuals, and that they are not allowed to issue, sell or trade financial products and private equity products under the supervision of the central financial authorities.

Since 2010, China’s local governments have been setting up FAE’s, originally to solve the financing problems of local small and medium sized enterprise. However, many FAE’s were involved in a number of illegal fund-raising activities and were subsequently subject to strict regulation. In recent years, FAE’s are becoming an important financing channel for real estate companies and local government owned infrastructure investment entities. The new document is believed to put a brake on the new waves of housing and infrastructure development.

Source: Central News Agency, September 13, 2020

CCP Provincial Party Committee Issues Directive to Prevent Japanese and Korean Companies from Leaving

In October 2019, Samsung closed its mobile phones plant in Huizhou city of Guangdong province. In June this year, Samsung announced that it will move its display production line from China to Vietnam. An internal document that the Huizhou government issued on August 10 showed that the Huizhou Import and Export business was hit hard when Samsung left and the CCP Guangdong provincial party committee asked that Huizhou take measures to stop Japanese and Korean companies from moving out.

In a confidential document that the Huizhou Municipal Bureau of Commerce issued on August 10, 2020, it stated that, in 2020, due to China US trade war, the pandemic, and the exit of Samsung, Huizhou’s import and export trade with Korea fell by 77.4 percent, of which exports plummeted by 89.5 percent. Out of 280 Korean companies, including Samsung and LG, which have invested in Huizhou over the years, as of July 2020 there were only 96 left, an indication that two-thirds of South Korean companies have left.

In the document, the Guangdong provincial party committee directed that Huizhou “take advantage of the relatively stable epidemic condition in Southeast Asia and use ‘fighting the epidemic together’ as the opportunity to prevent companies from Japan, South Korea and other neighboring countries from leaving. The document suggests that Huizhou use the upcoming economic conferences with Korea and Japan and focus on the promotion of the China-South Korea Industrial Park in Huizhou and organize Japanese and Korean companies with an investment interest to visit Huizhou. The document also summarized the recent cooperation projects Huizhou has with neighboring countries. It includes the opening of the Huizhou Economic and Trade Representative Office in South Korea at the end of August. These projects also include: hosting visits of Japanese, South Korean and Singaporean companies and institutions to visit Huizhou; returning visits to key enterprises in those countries; and engaging third party agencies to attract investment opportunities in Huizhou.

Source: Epoch Times, September 8, 2020

Indian Economist Points out China’s Faked Population Data

China’s National Bureau of Statistics announced in January this year that, at the end of 2019, the country’s population exceeded 1.4 billion. However, an Indian economist pointed out the data on population was falsified, especially the fictitious male-to-female ratio, in an effort to conceal China’s imminent population crisis.

On September 9, Shailendra Raj Mehta, an Indian economist, published an article called “A Shrinking China” in The India Express, an English language national daily newspaper in India. In addition to the serious falsification of population data in recent years, Mehta claimed that the falsification was to maintain the status of “the world’s most populous country,” and to conceal the severely unbalanced sex ratio and the rapidly declining labor force. He predicted that, within 10 years, China’s population problem would inevitably surface.

The article gave an example from the 2000 China Census data. At that time, there were 90.15 million people in the 5 to 10 age range. 15 years later, the same group reached the ages between 20 and 25 years-of-age. At that time, that is in the year 2015, the group had a population of 100.31 million, according to China’s official statistics. The number did not shrink due to normal deaths, but increased by at least 10 million people.

Mehta follow this reasoning in 2018, which had the latest figures which are available. That number swelled to 113.38 million, meaning that there were 23.23 million extra ghost people. Of these, 9.8 million were men, while 13.35 million were women. He concluded in the article “Hardline Chinese elements today are convinced that it is their destiny to be the dominant power in the world. They are eager to colonize the South China Sea and to show the U.S. and India their place. They wish to invade and occupy Taiwan. This combination of arrogance and obfuscation is volatile and always ends in tragedy.”

Source:, September 10, 2020
The Indian Express, September 9, 2020

The Short-lived Fate of China’s Chip Manufacturers

Recently, a number of scandalous projects in China’s semi-conductor chip industry came to a halt mostly due to a lack of funding. Local governments often desperately scramble for chip projects to show their political achievements. They have usually come up with the initial funding to secure the land and building but then suffered most of the loses if the project failed. Meanwhile, there are also groups that take advantage of policy loopholes and, because they lack accountability, they deceive those who do investment and funding.

Below is a list of reported cases.
1. HSMC, Wuhan Hongxin Semiconductor, is facing a large funding gap. As the single largest investment project in Wuhan in 2018, HSMC Wuhan Hongxin is reported to be a 128 billion-yuan (US$18.7 billion) project. It set the ambitious goal of manufacturing 30,000 units of 14 nm chips each month then followed by making 30,000 units of 7 nm chips. In 2019, it hired Jiang Shangyi, former Chief Technology officer from TSMC, as its CEO. Public information shows that in 2019, Wuhan Huanyu, a project subcontractor, sued Wuhan Hongxin and Wuhan Torch, the general contractor of the first phase of the project, for 41 million yuan (US$6 million) in delinquent payments. Since then, Wuhan Hongxin’s account has been frozen, and more than 300 acres of land worth 75.3 million yuan (US$11 million) in the second phase were also seized. It was reported that this seized land was previously used by Hongxin as security for mortgage loans. “Wuhan 2020 City-level Major Projects under Construction Plan” disclosed that, at end of 2019, Hongxin had received a total of 15.3 billion yuan in investment. In January this year, it had to use the ASML lithography machine it owns as collateral and borrowed 580 million yuan from Wuhan Rural Commercial Bank to cover the immediate cash shortage. However, that number is still far below the funding shortage of over 100 billion yuan.
2. In May, after pouring in US$1.2 billion in investment funds with thousands of acres of buildings being vacant, Globalfoundries ended a US$10 billion in chip manufacturing project in Chengdu of Sichuan province. This semiconductor project only lasted about 19 months.
3. On July 10, Dekema (Nanjing) Semiconductor Technology Co., Ltd. formally filed for bankruptcy. The project is claimed to be a US$3 billion investment. As early as 2019, the company was accused of a lack of credibility and was behind in payments for wages, vendors and taxes payments.
4. Beginning in 2019, Dehuai Semiconductor in Huaian of Jiangsu province defaulted on a large amount in employee wages, supplier loans and general loans. It now faces 10 lawsuits. As of the end of 2019, the Dehuai project received 4.6 billion yuan in investment funds, but has over 100 million yuan in outstanding debts.

Source: Sina, August 2020

China Agreed to Restructure Low Income Countries’ Debts

China has recently reached agreements with a number of low-income countries that applied for debt restructuring to assist these countries in fighting the epidemic. Analyses show that China holds the large debts of many low-income countries. Therefore, this agreement is significant.

The Financial Times reported that China’s Ministry of Foreign Affairs stated that China has reached an agreement with half of the 20 low-income countries that have requested debt restructuring. The Debt Service Suspension Initiative (DSSI) of G20 countries leads the negotiation framework for this agreement.

The DSSI was launched in April this year to help some low-income countries to focus on responding to the health and economic crisis that the COVID-19 epidemic caused. Eligible countries can freeze the repayment of bilateral loans until the end of this year. This is the first time that China has participated in a multilateral debt relief initiative. The agreement between China and Angola is critical.

In the past 20 years, among the African countries, Angola has been the largest recipient of loans from China, receiving about one third of China’s total loans to the continent. According to data from the World Bank, Angola’s loan payable of approximately US$2.6 billion may be suspended in 2020, accounting for 3.1 percent of the country’s gross domestic product (GDP). The Central Bank of Angola said that the country’s total outstanding external government debt approximates US$49 billion, of which China is owed 45 percent.

As the COVID-19 disease has caused severe damage to developing countries, more countries may request debt restructuring in the future. Redd Intelligence’s senior analyst Mark Bohlund said that, under the DSSI framework, “much of the burden falls primarily on China.”

Analysts pointed out that tracking the progress of DSSI negotiations in the past has not been easy. In particular, it is because China provides a large proportion of the loans and often does not fully disclose information. At present, China’s state-owned export credit agency, the Export-Import Bank of China, has issued most of China’s loans, but some also come from the state-owned China Development Bank.

Source: Central News Agency, September 2, 2020

Scholars’ View on China’s “Domestic Circulation” Strategy

Recently, at the semi-annual meeting of the Chinese Communist Party’s (CCP) Politburo, General Secretary Xi Jinping proposed a new economic strategy in response to the deteriorating relationship with the U.S. and the slowdown of the global economy. The “dual circulation” strategy aims to replace the prevailing one driven by exports and infrastructure investment with one led by domestic consumption, or “domestic circulation.” He Jiangbing, a Chinese financial expert told the Taiwan based Central News Agency that the truth is, “People don’t have money.” This is the basis for China to implement “domestic circulation.” It is because they cannot afford the expensive imports.

According to the calculations of the Income Distribution Research Institute of Beijing Normal University, 964 million Chinese people earn a monthly income below 2,000 yuan (US$ 292.50); 364 million earn a monthly income between 2,000 (US$ 292.50) and 5,000 yuan (US$ 731.10); and only 72 million people, or 5.13 percent of the total population, have a monthly income of more than 5,000 yuan (US$ 731.10). Data from China’s National Bureau of Statistics (NBS) also shows that 40 percent of the households, a population of 610 million, make about 1,000 yuan (US$ 146.20) a month on average.

He pointed to three issues related to “domestic circulation.” The first is the widening food shortage; the second is advanced technology that depends on advanced economies such as the United States, especially the annual import of over US$ 300 billion worth of chips; the third is the energy sources such as oil and natural gas that rely on imports.

Liu Kaiming, director of the Shenzhen based nongovernmental organization, the Institute of Contemporary Observation organization, believes that it is difficult for export oriented companies to switch to domestic sales. Generally speaking, “China’s total production capacity exceeds the domestic demand by about one-third.” Without external demand, “one third of those companies will go bankrupt.” China’s total exports last year were about 17 trillion yuan (US$2.5 trillion). Even a drop of 1 percent, or 170 billion yuan (US$25 billion), is enormous. The gap must be filled by the corresponding domestic market.

Liu added that China’s manufacturing industry consists of two parts: the domestic market and the foreign market including Hong Kong, the U.S. and Europe. The products made for the former domestic market are of lower quality, while those made for the latter have a higher quality and technology, and employees are paid better. If the government promotes “domestic circulation” as the main driver of the economy, because the income of Chinese people is generally low, firms will have to lower the quality and resort to price competition. “The domestic circulation cannot drive and improve the quality of products made in China.”

Liu believes the major problem for the Chinese people is “no money.” To reduce its dependence on exports, China has to increase domestic consumption.

Source: Central News Agency, September 1, 2020

China’s Banking Industry: Non-performing Debt to Surge as Preferential Policies Expire

The profitability of China’s banking industry has severely deteriorated as a result of the ongoing epidemic. Each and every of the five state banks has recorded double-digit negative first-half net profit growth. According to Reuters, increasing the provisions for bad debts and more speedily disposing of them are the banks’ main measures for dealing with the slowing economy and the impact of the virus.

Liao Lin, vice president and chief risk officer of the Industrial and Commercial Bank of China (ICBC), talked about the mounting pressure of controlling the quality of the collateral for deferred loan repayments in the second half. Jin Yanmin, the chief risk officer of China Construction Bank (CCB), expressed that the expiration of relevant preferential policies that help companies to recover may affect the appraised value of the customers’ assets. In the first half of next year, more non-performing debts may surface. Zhang Qingsong, President of the Agricultural Bank of China (ABC), mentioned two sectors with greater uncertainty in the mortgage assets: one is the businesses that the epidemic directly impacts, such as catering, accommodation, tourism, and entertainment; the other is those with a high degree of external dependence and high risks due to external uncertainty, such as export-oriented low-end manufacturing.

The interim results of the five major banks showed that their non-performing loan ratios are slightly on the rise, ending a three-year downward trend. Among them, the Bank of Communications (BC) shows the largest climb at 21BP (basis point), followed by ICBC and CCB, both at 7BP. Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission (CBIRC), the state regulator of the banking industry, recently stated that the banking industry is expected to dispose of 3.4 trillion yuan (US$ 500 billion) of overdue loans this year, compared to 2.3 trillion yuan (US$ 340 billion) last year.

Source: Central News Agency, September 1, 2020