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Sina: Two Conglomerate Giants Face Financial Crisis

Recently two conglomerate giants the HNA Group and the Founders Group found themselves to be in a deep financial crisis. On April 14, during a creditor’s meeting, the HNA Group’s request for a one-year debt extension was turned down. On February 29, the heavily indebted HNA announced that it has entered into the takeover process and is working with a task team that the Hainan Provincial Government formed during the transition. Meanwhile the Founders Group announced that it will be unable to meet its debit payment and has entered into a bankruptcy procedure. It is currently working with the bank, the department of Education, and other financial institutions on the restructuring process.

According to Sina, both companies were expanding rapidly in recent years through a large numbers of mergers and acquisitions, using capital operations to inflate their assets. The source of the funds was that they were incurring debts from the banks and from strategic investors. The risk to this model was that, as soon as it received the profit from the subsequent investment, it was unable to cover the interest from its previous debt and the company faced a cash flow risk. In 2018, the HNA group started to have cash flow and liquidity issues. Despite the fact that it sold more than 300 billion of its assets in 2018, it was still unable to improve its capital structure. {Editor’s note: According to sources from overseas media, HNA’s expansion could also be partially related to unspecified private cash investments that top party officials in China made in order to transfer their assets overseas.}

Source: Sina, April 15, 2020

CNA: China Auto Industry Faces Parts and Order Shortages

Affected by COVID 19, the Chinese auto industry is facing parts and order shortages. Despite the fact that the Chinese government recently introduced a stimulus plan for electric vehicles and used cars, it is believed that the fate of the Chinese auto industry is dependent on the recovery of the supply chain outside of China. The Central News Agency reported that, due to uncertain future orders, once they are caught up making the existing safety stock orders, many auto manufacturing plants may have to shut down. To reduce their costs, some factories have started to give workers three days off a week from their work shift. Meanwhile the auto market demand is weak as well. Auto sales revenue in the last week of March was down 24 percent compared to the same period in 2019. Airtex in Tianjing is predicting a 30 percent order reduction once the U.S. can get out of its COVID 19 lockdown. As most countries in Europe and the US are dealing with COVID 19, auto makers in China, especially electric auto manufacturers who rely on imports of key components and parts, will face a parts shortage. It is expected that the risk to the auto industry will come in the second half the year.

Source: Central News Agency, April 11, 2020

Beijing News: Multiple Countries Called Off Food Exports; Is China Safe?

Beijing News recently reported that, according to the Food and Agriculture Organization of the United Nations (FAO), food safety may become an issue in some countries and regions due to the lack of labor and to supply chain disruptions. The FAO expects the worst case may occur in April or May. Multiple food exporters are limiting or even banning the export of food. For example, Kazakhstan has banned exports of wheat, carrots, sugar and potatoes. Serbia has stopped exporting sunflower oil. Vietnam has also restricted rice exports and Russia has stopped exporting finished grains. China is seeing high volume of food purchases in many cities. China imports around 100 million tons of food every year, which is a quarter of the world’s food trade volume. China has enough wheat, rice and corn stock as well as the capacity to produce domestically. However, soybeans, which hold an 80 percent share of the 100 million annual food imports, may be impacted. However, the impact is not obvious at the moment. In the future, the bottleneck could be on the transportation side, since the United States and Brazil are China’s primary suppliers. A temporary halt could happen, yet it is expected to be a very short one.

Source: Beijing News, April 1, 2020

RFA: As More Retail Stores Are Put up for Sale, More Businesses Will Shut Down

COVID 19 has hit China’s economy hard, especially in the retail industry. In the Xinjiekou commercial area of Nanjing, Jiangsu province, some netizens took pictures which show that there were more than a dozen shops on the street with “For Sale” signs on them. Scholars believe that as the COVID 19 outbreak continues to worsen in the US and other Western countries, foreign countries will stop imports from China. Thus there will be more Chinese companies that will face bankruptcy. One resident in Wuhan said that many small businesses are trying to think of a backup plan. Once the lock-down in Wuhan has ended, many of the small businesses won’t be able to survive even with a loan from the government. This applies to retail business in Zhejiang, Fujian province and all the way to Helongjiang province in the northeast part of China. A retired Economics Professor at Sichuan University told Radio Free Asia (RFA) that there will be a wave of business shutdowns. As COVID 19 continues to spread around the world, more businesses will close. The impact is no different from a world war.

According to private surveys, nearly 30 percent of China’s population has no savings in the bank. Since the national economy has been shut down for the past two months, the local government’s fiscal revenue has also been greatly affected. Provinces and municipalities have recently announced their February fiscal revenue. Among them, Hubei is the worst. After deducting the income from land, the fiscal revenue fell 98.5 percent compared to the same period last year. Henan, the neighboring province of Hubei also fell 30 percent and Guangdong, a major export province, fell 27 percent. Most provinces and cities have fallen by more than 20 percent.

Source: Radio Free Asia, April 3, 2020

Chinese Scholar: Recession Is Inevitable

Xu Xiaonian, a professor of economics and finance at the China Europe International Business School, said that as long as the pandemic in Europe and America is not over, Chinese export companies will have no orders, and a recession is inevitable. Xu made the remarks at the CEIBS Alumni Association on the evening of March 26 when discussing the outlook for the recent pandemic and the Chinese economy.

Xu Xiaonian said in his speech that the current rate of resumption of work is actually meaningless. “Where are the orders?”  He asked.

Xu believes that many of the online discussions about an international pandemic are “foolish.” As long as the pandemic in Europe and America is not over, China has no orders; workers have no wages and there is no consumption. “We are not able to finish the rest of the course by ourselves. We have to accompany the whole world to finish the entire journey. Only when the world economy returns to normal can China be normal. ”

“We can’t close the door and play by ourselves. We are not only short of food and oil, but we are also short of markets; we are short of orders. Our per capita GDP is one-fifth of that of the United States and one-fourth that of Europe. The domestic purchasing power cannot support our enormous manufacturing capacity.”

He also said, “We still lack raw materials, especially the technology-intensive basic raw materials, which must be imported from South Korea, Japan and Germany. We lack technology, and technology cannot be developed rapidly when we close the door.”

Source: Sina, March 30, 2020

The Paper: Beijing to Increase Deficit Rate and Issue Special Government Bond

According to The Paper, China’s Politburo held a meeting on March 27. For the first time, it proposed to “appropriately raise the fiscal deficit rate and issue special government bonds” to deal with the impact of the epidemic on the economy. A number of economists recommended a deficit rate of 3.5 percent versus 2.8 percent in 2019. It would bring in 700 billion yuan (US$99 billion). Meanwhile they also recommended issuing a special government bond of no less than 1 trillion yuan (US$140 Billion). Moreover, they reiterated that the local government could increase the scale of their special debt limit from 2.15 trillion yuan (US$300 billion) for 2019. If the deficit rate for 2020 were to increase to 3-4 percent, it would mean that the local government debit limit could go up to 4 trillion yuan (US$560 billion).

Source: The Paper, March 27, 2020

China Economy: Offshore RMB Fell Nearly 900 Points

China Economy recently reported that, on March 19, Chinese currency RMB fell 865 base points, against the US Dollar, in offshore trading. At the same time, the RMB fell 938 base points onshore. This is the first time since October 2019 that the Chinese RMB fell below 7.16 Yuan for one US Dollar. The U.S. Dollar has seen strong growth recently, with high demand across the globe. It is becoming the core asset for managing risks because of its nature of being fully exchangeable with full global circulation. Experts expressed their belief that the significant decline of the Chinese RMB is typical for a market full of volatility.  At the same time, China is facing high pressure on interest rate reduction. Some investment organizations pointed out that the Chinese currency is looking at further devaluation in the near term and in the foreseeable future. Offshore RMB (CNH) is RMB that circulates outside Mainland China. CNH settlements are typically done in Hong Kong, Singapore, London and Luxembourg.

Source: China Economy, March 19, 2020

Apple Smartphone Chinese Sales Saw a Sharp Decline in February

Shanghai-based Chinese financial news site East Money recently reported that, according to statistics that the China Academy of Information and Communication Technologies just released, the Chinese smartphone market declined by 54.7 percent, year-over-year. Apple iPhone sales in China saw a 61 percent decline during the same period of time. Apple announced its first quarter sales will miss its earlier projection, mainly due to the public health situation in China, which has impacted both manufacturing and market demand. Although Apple’s Chinese factories resumed their work, yet the pace of restoring capacity has been slower than expected. This will impact Apple’s global sales. Some Apple suppliers like Qorvo also reduced their forecasts. Also worth noting is that, the International Data Group (IDC) projects that the first quarter global smartphone sales will decline by 40 percent, year-over-year.

Source: East Money, March 9, 2020

The Government Is Taking over the HNA Group

The HNA Group, is a rapidly expanding airline and conglomerate in China. After the high-profile mysterious death of its Chairman, Wang Jian, in France in last year, the Hainan Provincial government has been leading its restructure.

The HNA Group announced on February 29 that its high liquidity risk that started at the end of 2017 continued and worsened in 2020 due to the novel coronavirus. Therefore, it requested to form the “Hainan Provincial Government HNA Joint Working Group” to coordinate and address the risk. The Hainan Provincial government has led the working group.

Key personnel in the joint work group are all from government offices or state-owned enterprises:

  • Director Gu Gang, Chairman of Hainan Development Holding Co., Ltd, which is directly owned by the Hainan Provincial government
  • Executive Deputy Director Ren Qinghua, Director of Management Committee of the Hainan Yangpu Economic Development Zone
  • Deputy Director Li Shuangchen, Deputy Director of the Central and South China Regional Administration, Civil Aviation Administration
  • Deputy Director Cheng Gong, Deputy Director of the Credit Management Bureau, China Development Bank.

The HNA Group also re-elected its seven-member board. Gu Gang and Ren Qinghua joined the board. While HNA Co-founder Chen Feng remained as the Chairman, Gu Gang became the Executive Chairman and Ren Qinghua became the joint-company CEO.

HNA Group Co., Ltd. is a Chinese conglomerate headquartered in Haikou, Hainan, China. Founded in 2000, it is involved in numerous industries including aviation, real estate, financial services, tourism, logistics, and more.

People have been sayings that the HNA Group is connected with Wang Qishan.

Source: Stock Times, February 29, 2020

Economy: China’s Exports in January and February Dropped 17 Percent

Because of the Impact of the novel coronavirus, China’s exports in the first two months of this year dropped dramatically. According to the data that the General Administrations of Customs released on March 7, China’s exports in those two months were US $292 billion, a decrease of 17.2 percent from the level a year ago. Imports were US $299.5 billion, a decrease of 4 percent. China had a trade deficit of US $7 billion, the first trade deficit since April 2018. A year ago, China had US $41.5 billion trade surplus.

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Source: Radio France International, March 7, 2020中国/20200307-受新冠肺炎疫情影响中国1-2月出口同比下降17-2