We believe that politics and economics are two driving factors behind the Xi Jinping leadership’s decision to subject Hui Ka Yan to “mandatory measures” at this time.
On Sept. 28, China Evergrande announced the “relevant authorities” had subjected its chairman and executive director Hui Ka Yan to “mandatory measures in accordance with the law due to suspicion of illegal acts,” or parlance used in the People’s Republic of China to indicate an investigation and arrest. In the two weeks leading up to Hui’s purge, mainland media outlets reported the arrest or detention of over a dozen other top executives of Evergrande and its subsidiaries.
The Wall Street Journal reported on Oct. 1 that the Chinese Communist Party authorities had probed Hui Ka Yan over his effort to transfer assets offshore while Evergrande was struggling to complete unfinished projects, citing people familiar with Beijing’s decision-making. This explanation, however, does not seem to provide the full picture given that Hui had been constantly moving assets abroad, including before and during the Evergrande crisis. Put another way, the explanation offered by the Journal’s sources does not account for why Beijing moved in on Hui when it did.
We believe that politics and economics are two driving factors behind the Xi Jinping leadership’s decision to subject Hui Ka Yan to “mandatory measures” at this time.
Property sector ‘hard landing’
Hui Ka Yan appeared to have been “spared” by the CCP authorities in the first few years of the Evergrande crisis likely because Beijing still believed that it could prevent a “hard landing” for the real estate sector.
However, the Xi leadership appears to no longer harbor such illusions. Three years of “zero-COVID” measures hastened the already rapid deterioration of the Chinese economy, while the virus itself appeared to have exacted a heavy toll on China’s shrinking demographic. China has entered into a “balance-sheet recession” where people’s appetite for buying property has waned considerably due to declining incomes, and there is a preference to make loan repayments instead of taking on debt over concerns about falling asset prices and the country’s poor economic growth prospects.
Beijing’s latest efforts to stimulate the real estate market have also failed to take off. In July, the Politburo pledged to “adjust and optimize real estate policies in a timely manner,” and local governments moved to relax or scrap property purchase restrictions in August and September. Yet data released by China Index Academy on Oct. 1 showed that the transaction volume of new commercial housing in first-tier cities in China and in 50 key cities plummeted in September, including by as much as 30 percent to 60 percent as compared to 2022 when COVID lockdowns were in effect.
Neither did property sales pick up over the “Golden Week” holiday from Oct. 2 to Oct. 8, or one of the peak transaction periods in China. China Index Academy data showed that only 13,140 new commercial housing units were sold during the holiday, down 70.5 percent from a week ago and down 30.6 percent year-on-year. The transaction volume of new commercial housing in the four tiers of Chinese cities was also down by as much as 70 percent across the board.
Measures by local governments to boost home sales could potentially worsen the property sector crisis. For instance, some local governments have been removing price floors in late August to early September to drive up sales. But the scrapping of price floors also affects property value. ANZ noted in a September report that a 30 percent drop in property values could see 12 percent of China’s $5.3 trillion mortgage book become negative equity, while a drop of property prices by half would see negative equity rise to 19.8 trillion yuan, or about 51 percent of China’s total mortgage portfolio. Therefore, instead of increasing sales, the removal of price floors could end up tanking property asset value and discouraging people from buying homes.
More ominous signs for the real estate sector emerged after the “Golden Week.” On Oct. 9, a group of investors holding over $6 billion of Evergrande’s bonds in notional terms issued a statement urging the developer to get regulators to approve its scrapped restructuring deal. The investors note that Evergrande is on course to be wound up at a hearing on Oct. 30 without the deal, and “this will likely lead to the uncontrolled collapse of the group.” A day later, Country Garden, which replaced Evergrande as the leading property company in China, warned in a filing with the Hong Kong stock exchange that it could default on some of its offshore bonds.
If the Xi leadership reckons that a “hard landing” for the property sector is inevitable, then it would have few qualms now about shaking buyer confidence by arresting Evergrande’s Hui Ka Yan. Rather, Beijing now has a convenient scapegoat to blame for China’s property sector woes and could later issue propaganda casting the CCP authorities as the “savior” for moving against the culprits responsible for the crisis.
Factional struggle
Xi Jinping could also have decided to detain Hui Ka Yan now as part of a broader effort to root out his remaining factional enemies.
Hui has long been known to have close associations with Zeng Qinghong, the de facto head of the Jiang Zemin faction with the passing of Jiang in late 2022. Hui is also likely to have connections with former Politburo Standing Committee member, ex-Guangdong Party Secretary, and Jiang faction member Zhang Dejiang. Without the powerful political backing of Zhang, Zeng, and the Jiang faction, it seems unlikely that Evergrande would have been able to expand nationally in the 2000s and eventually make the Fortune 500 list in 2016.
Xi would also have greater determination to make moves against Hui Ka Yan and Zeng Qinghong now if he suspects that Zeng and others in the domestic “anti-Xi” crowd were behind the developments that forced Xi to sideline his political allies like foreign minister Qin Gang and defense minister Li Shangfu. The takedown of Hui and anti-corruption investigations into Evergrande could pave the way for Xi to later purge Zeng and the remnant Jiang faction, as well as denounce Jiang Zemin and hold the Jiang faction responsible for creating the many crises currently plaguing China and saddling the Xi leadership with picking up the pieces.
Whither Evergrande?
The probe of Hui Ka Yan and other Evergrande executives suggests that Beijing could allow Evergrande to declare bankruptcy and enter into liquidation. State-owned enterprises could be tasked to take over some of Evergrande’s more valuable assets and land, as well as handle the company’s unfinished projects.
Evergrande and Hui’s downfall will almost certainly worsen China’s property sector crisis and the spread of financial contagion. Worsening economic problems will also very likely deepen Xi Jinping’s political troubles and create fertile conditions for political Black Swans to emerge in China.
