From Nomura via FTAlphaville:
Our anecdotal checks reveal that for cases involving cooperation among various local and central governments, distribution of any recovered funds has largely been based on negotiation among the governments involved.
… a billion here, a billion there
In the Report on the Work of the Supreme People’s Procuratorate (8 May 2014), the government disclosed that there were 2,581 corruption cases valued at CNY1mn or above in 2013, resulting in recovery of CNY10.14bn in illegal proceeds. Reuters reported on 30 Mar 2014 that Chinese authorities had seized assets valued at at least CNY90bn related to the Zhou Yongkang case. Oriental Daily reported on 1 Jul 2014 that Xu Caihou had turned in CNY1bn-plus of illegal proceeds and may have another HKD10bn tucked away in Hong Kong. We note that reported corruption cases have occurred in some well-oiled sectors, including the military, coal, energy and utilities. With Beijing expanding investigations into local governments’ past land sales and the financial space, on top of the SOEs, total seized assets will likelyrise. Hypothetically, if 3% of China’s GDP since 1995 went to corruption, this would total CNY4tn, assuming the amount was compounded at the modest PBOC 1-year benchmark savings rate and a 25% recovery rate. We note the actual amount could be even higher considering the decade-long bull market in various assets.
So, perhaps the LGFV risk is not so unmanageable after all?
While the distribution of seized illegal gains among central and local governments would be subject to technicalities, we are talking about a lot of money that could help to fix quite a few problems. China’s fiscal income was CNY12.9tn and fiscal deficit was CNY1.1tn in 2013. As of end-June 2013, the balances of China’s local government funding vehicle (LGFV) and local government debt were estimated at CNY7tn and CNY10.9tn, according to the National Audit Office. While family members have been allowed to retain illegal proceeds in cases where the official(s) involved are deceased or out of jurisdication, we expect tougher efforts by Beijing to seize all illegal gains under the new Code of Criminal Procedure effective in 2013, the Ministry of Public Security’s “Fox Hunting 2014” project and the APEC anti-corruption network established in August 2014.
All speculative but has a certain poetic symmetry. The latest updates on real estate suggest more work will be needed. From Investing in Chinese Stocks:
Yulin in Shaanxi became wealthy on coal mining. Then came a real estate boom, pyramid loans and the bust. A decade of wealth wiped out in a two year crash as coal prices collapsed. The saga has everything. Bank loans were cheaper than private loans, so individuals loaded up on bank debt and then lent into the private market to earn higher rates. Credit guarantee firms, rehypothecated assets and fraud all play their role.
Yulin, Ordos and other isolated cases, in part because of the coal industry, in part because they took speculation to the extreme. However, the stories here are only amplified versions of what goes on all over China. 榆林民间借贷危机：谁是债务雪球推手
Some more hopeful news in first tier cities of Shanghai and Beijing where existing home sales are picking up in first tier cities and that is helping to stabilize prices. The article below interviews one seller in Beijing who wants to trade up to a nicer home. She is selling one home in Shangdi and another in Tongzhou, but she is unwilling to drop the price to get a sale done, thinking she can find a buyer within one or two weeks. Analysts aren’t so optimistic though, seeing the recent rebound in sales as very limited. 一线城市房主咬牙扛价绝不降价 二三线平价卖房无人问
