WSJ : Xi Jinping Is Looking for Someone to Blame for China’s Property Bust

Xi Jinping Is Looking for Someone to Blame for China’s Property Bust

On the prowl for villains, Beijing expands real-estate probe to financial institutions

With China’s property bust threatening to sink the country’s economic recovery, Xi Jinping is looking for someone to blame.

After putting the billionaire founder of Evergrande, a heavily indebted property firm, under investigation for possible crimes, Beijing is expanding its probes to include bankers and financial institutions that facilitated developers’ risky behavior, people familiar with the matter say.

Among those under scrutiny: a former head of Bank of China, one of the country’s biggest lenders, the people said.

While meeting with senior officials last month, Xi made it clear he wants no stone left unturned when it comes to disciplining a real-estate industry that at its peak made up as much as a quarter of China’s economy.

Xi indicated at the meeting that he could tolerate slower growth as a result of the property slowdown, people familiar with the matter said. But anticorruption must be carried through to the end, he added.

Bank of China, Evergrande and the State Council Information Office, which handles inquiries for China’s leadership, didn’t respond to requests for comment.

The widening probes, while potentially useful for regulators’ understanding of China’s real-estate mess, risk distracting from more substantive measures to stabilize the beleaguered property sector, economists say.

The end of China’s property boom has saddled the country with debt, spooked investors and left many consumers unwilling to spend. Analysts say they expect more sluggish growth ahead for the world’s second-largest economy, and can’t rule out a wider financial crisis if more isn’t done to restructure developers’ debts and shore up confidence in the sector.

Evergrande, which had the equivalent of more than $327 billion in liabilities at the end of June, disclosed an investigation into its founder, Hui Ka Yan, in September. While no details have been disclosed since, authorities have been looking into whether Hui squirreled assets overseas while Evergrande struggled to deliver homes people had already paid for, The Wall Street Journal has reported.

Ties of ‘Brother Belt’ to banks under scrutiny

Another focus of the Hui probe, people close to Beijing said, is whether Hui and his management team engaged in illegal fundraising activities, such as giving kickbacks to banking executives in exchange for loans.

Following news of the investigation into Hui, dubbed “Brother Belt” by many in China for his penchant for Hermès belts, videos of his lavish lifestyle—including a dancing troupe he kept on the company’s payroll to entertain bankers and other VIPs, despite its financial stress—have flooded China’s tightly monitored social media, a sign of Beijing’s intention to make an example of him.

Officials are particularly interested in Evergrande’s 20 or so largest creditors, including state-owned banks and some controlled by lower levels of government.

Earlier this month, Liu Liange, who served as Bank of China’s chairman and Communist Party secretary from 2019 until early this year, a period when the bank’s importance to Evergrande grew, was arrested on charges of accepting bribes and illegally granting loans. Liu was put under investigation by the party’s antigraft force in March and expelled from the party a few days before his formal arrest.

China announced the charges against Liu just a few days after the investigation into Evergrande’s Hui became known, without elaborating on the allegations.

People familiar with the matter said the charges against Liu partly involved the bank’s lending to Evergrande. They said the announcement’s timing was intended to be a warning shot to major banks and their executives over their exposure to Evergrande and the troubled property sector overall.

Another bank under scrutiny, people familiar with the matter said, is China Minsheng Bank, Evergrande’s biggest lender.

Earlier this year, Minsheng applied with securities regulators to issue a roughly $7 billion convertible bond in a bid to beef up its capital base amid market concerns about its property exposure.

Regulators inquired about the bank’s real-estate exposure as part of their review of its application. In July, Minsheng was required by the Shanghai Stock Exchange to list all its property borrowers, including those that had defaulted or were at risk of defaulting.

Minsheng never supplied the information, people familiar with the matter said. A month later, the bank pulled the offering, citing the “capital market environment.”

The inquiry into Hui is expected to assist authorities in their investigations into the lending practices of Minsheng and other banks to Evergrande, people familiar with the matter said.

Minsheng didn’t respond to queries.

Risks to China’s economy

Xi started taking on property in late 2020 after years of rapid growth in the sector raised fears of a bubble. A policy dubbed “three red lines” imposed strict debt and cash-flow targets on developers, all but choking off liquidity for many of them.

With their access to funding curtailed, Chinese developers have defaulted on more than $120 billion of bonds issued outside the mainland. Country Garden, once hailed as a model developer in the country, recently became the latest Chinese property giant to fail to repay bondholders.

The government has taken some piecemeal steps to support developers and stimulate home buying, but has stopped short of rolling out a comprehensive plan to assist developers with debt restructurings and to get banks and other stakeholders to take losses—all parts of a process economists say could be essential to keeping risks from spreading.

Part of the reason for the lack of a comprehensive debt-restructuring plan is the guidance from Xi himself that the property sector must be squeezed, people close to Beijing’s decision-making said.

As a result, policy recommendations such as those calling on Beijing to increase spending to bail out some big developers or local governments and then get them to deliver unfinished houses haven’t got much traction, the people said.

Meanwhile, developers’ financial distress is dragging down home sales and housing starts as they run out of money to finish projects and build new ones. Weakening home prices are squeezing developers even more and slowing China’s rebound from dismal growth this summer.

“The weak economic recovery obviously has a lot to do with the knock-on effects from property,” said Arthur Kroeber, founding partner and head of research at Gavekal Dragonomics.

In a sign of potential wider risks, fears of Evergrande’s financial troubles sparked a run this month on a small bank in northern China’s Hebei province. Depositors lined up at the Bank of Cangzhou after social-media posts said the bank’s lending to Evergrande totaled 3.4 billion yuan, equivalent to $465 million, which would make it one of the developer’s top 20 bank creditors.

The bank run was stopped after the city government in Cangzhou urged calm and the city-controlled bank issued a statement saying its outstanding loans to Evergrande were 340 million yuan instead of the rumored 3.4 billion yuan. The bank also stated “the overall risk is controllable.”

“The weak economic recovery obviously has a lot to do with the knock-on effects from property,” said Arthur Kroeber, founding partner and head of research at Gavekal Dragonomics.