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Chinese state investors sound alarm on cash crunch after defaults

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Chinese government entities responsible for funding hundreds of billions of dollars in infrastructure projects are struggling to raise cash after a series of defaults by state groups rocked the country’s credit markets.

Executives from several local government finance vehicles (LGFVs) have told the Financial Times that they have abandoned bond sales or loan applications after debt-saddled state-owned enterprises, led by Yongcheng Coal & Electricity Holding Group, defaulted in November. Other LGFVs are paying much higher rates of interest to borrow.

The credit crunch facing LGFVs, which are responsible for funnelling cash to China’s local governments, has raised concerns that defaults at state-owned enterprises are spilling over into other parts of an economy whose recovery from coronavirus has been supported by infrastructure spending.

“LGFVs are one of the most important tools Chinese local governments can employ to achieve their policy goals such as boosting investment and creating jobs,” said Dan Wang, chief economist at Hang Seng Bank China. “Numerous projects could be stalled if LGFVs lose access to credit.”

While global capital inflows into China’s bond market have picked up considerably in recent years, most western investors are focused on bonds backed by China’s central government or policy banks. The problem with LGFVs, one of the biggest components of China’s bond markets, will undermine Beijing’s efforts to attract foreign capital into its capital markets.

Many Chinese cities and provinces rely on LGFVs to raise capital on their behalf to get around official restrictions on taking on leverage. According to Ms Wang, they have been the main contributor to China’s rapidly growing debt burden.

According to the Institute of International Finance, China’s total debt — household, government, financial and non-financial corporate — to GDP ratio hit 335 per cent in the second quarter of 2020, up from 318 per cent in the first quarter of this year.

“We are the biggest creditor to local governments and the biggest debtor to China’s financial system,” said an executive at Hanjiang Urban Construction Development Co, an LGFV based in the eastern province of Jiangsu, who was not authorised to speak to the media.

The defaults at SOEs have also shattered a long-running perception among investors that authorities in China will always step in to rescue financially imperilled state groups.

“We will run into trouble when authorities are too stretched to bail us out,” the executive added.

In 2019, LGFV borrowing accounted for almost half of China’s new business loans and a third of corporate bond issuance, according to official data.

Figures also show that LGFVs, which collectively are China’s biggest spender on construction projects, sold a record Rmb3.4tn in bonds in the first three-quarters of this year, a 31 per cent jump from a year earlier.

These bonds have historically benefited from strong investor demand based on their high credit ratings, even as projects such as roads and bridges have suffered from razor-thin profitability and lack of cash flow.

However, total LGFV bond issuance has dropped 14 per cent year on year since Yongcheng reneged on its debt repayments nearly a month ago, according to information provider Wind.

“Investors don’t see us as a viable business when government support is gone,” said an executive at Chengfa Investment Group, an LGFV based in the eastern Chinese province of Shandong. The firm last week dropped a plan to issue an Rmb820m bond owing to “market turmoil”.

Bank loans have also dried up for many struggling LGFVs. An executive at Zhongyuan Bank, a creditor to multiple government-controlled investment platforms, said the lender had “significantly” tightened standards for LGFV borrowers to control its risk.

“We used to work with any state-backed platforms regardless of their fundamentals,” said the executive. “Now we pay close attention to their leverage ratio and sources of debt repayment before approving or turning down their loan requests.”

LGFVs that are still able to borrow are having to pay more for the privilege, which in itself could exacerbate financial stress.

Public records show that, on average, the yields on new bonds issued by LGFVs have jumped to 4.8 per cent since Yongcheng defaulted. That compares with less than 4 per cent in the first nine months of the year.

That has made it much more difficult and expensive for LGFVs, many of which are lumbered with high levels of leverage, to roll over their existing debts.

“If we don’t borrow now, we will have trouble servicing debt due next month,” said an executive at Yan’an Urban Construction Group.

The LGFV has had to stump up an extra 180 basis points on average to borrow from the bond markets over the past nine months.

“If we do take credit at a higher cost, we will have a hard time pay it off in the coming years,” the executive added.



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Hong Kong’s Olympic successes expose deep political fissures

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Hong Kong politics updates

The Hong Kong Olympics team’s future as a separate entity from that of mainland China is secure, the territory’s Games chief Timothy Fok said, despite political tensions exposed by his squad’s historic achievements over the past week.

Siobhan Haughey, a Hong Kong swimmer, won a second silver medal in Tokyo on Friday, cementing the Games as the city’s most successful ever. Fencer Cheung Ka-long won the city’s first gold medal since its 1997 handover from the UK in the foil event.

But the euphoria over their victories quickly became politicised when crowds in the territory celebrating Cheung’s gold booed and shouted “We are Hong Kong” over the Chinese national anthem, which played as he accepted his medal on the podium in Tokyo this week.

Police have launched an investigation and said on Friday they had arrested a 40-year-old person, who also waved Hong Kong’s colonial-era flag at the scene, for insulting the national anthem.

The display of resistance was a stark reminder of a strong lingering undercurrent of discontent in the Asian financial centre, despite a crackdown on dissent by Beijing after anti-government protests in 2019.

China last year imposed a tough new security law last year on Hong Kong, with the first person to be convicted under the legislation, a former waiter who rode a motorbike into a police line last year, given a nine-year jail term on Friday.

But Fok, president of the national Olympic committee of Hong Kong, said he had urged athletes to ignore the controversies. There was an understanding in China that Hong Kong had “a separate identity” to the mainland and there were no plans to integrate the city’s team with that of its bigger neighbour, he said.

“They have [1bn] people, we only have 7m. I am very proud with this new encouragement and success. Sport will be a very important part of the development of Hong Kong.”

Hong Kong authorities are keen to demonstrate the crackdown has not had an impact on the city’s vibrancy. Carrie Lam, Hong Kong’s chief executive, said last week that arts and culture in the city were “booming” and there had been no weakening of people’s freedoms.

The city was promised a high degree of autonomy and freedom of expression after 1997. This autonomy was symbolised by Hong Kong’s right to have its own Olympics team, although it was also agreed that China’s national anthem would be played at medal ceremonies for the territory’s athletes.

Shushu Chen, a lecturer in sport policy at the University of Birmingham, said the mainland had shown significant support for elite sport development in Hong Kong

“I don’t think the Chinese government will advocate in future Olympics that Hong Kong athletes should be integrated under the main PRC flag,” she said. “That will lose the sense of identity of Hong Kong . . . I don’t think that is what the Chinese government is trying to do.”

Tam Yiu-chung, Hong Kong’s sole delegate to the National People’s Congress Standing Committee, the permanent body of China’s parliament, said that any change was unlikely under “one country, two systems”, the Chinese government policy governing Hong Kong’s autonomy from the mainland since the handover.

Hong Kong’s only other gold medallist, windsurfer Lee Lai-shan, accepted her medal at the 1996 Atlanta Games under the British Hong Kong colonial flag as “God Save The Queen” played.

Cheung, whose parents were both Chinese national league basketball players, is a cat lover who often posts pictures of his family’s American shorthair Zimba. “It means a lot to show to the world we can do it,” he said. “We are not only a city. We can fight for victory.”

While Cheung made no political comments after his win, pro-democracy groups were quick to seize on the victory. During the 2019 protests, anti-government demonstrators sang their own anthem “Glory to Hong Kong” in shopping malls. After Cheung’s ceremony, netizens substituted the Chinese anthem for the song in viral videos showing Cheung on the Tokyo podium.

Hong Kong’s pro-Beijing camp also generated controversy when a lawmaker Nicholas Muk criticised one of the territory’s top badminton players for wearing a black T-shirt — a colour favoured by the 2019 protesters — without displaying the Hong Kong flag.

After Muk accused him of supporting the pro-democracy movement, the player, Angus Ng Ka-Long, wore a different shirt to try to calm things down as he also came under attack from Chinese netizens.

Even though he was the eighth seed in the men’s singles competition, Ng was beaten by Guatemalan shuttler Kevin Cordon, who was ranked 59th, leaving many supporters blaming Muk for distracting Ng.

“It is probably not true that there was no impact. I have been trying hard to calm down and I want to focus on the competition,” Ng said after losing. “But how can I forget it completely.”



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Ben Okri: rediscovering a 4,000-year-old poem

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When the world began to close down 17 months ago, I was filled with a sense of foreboding about what would befall the life of the spirit, and wrote a heartfelt appeal in this paper urging the world not to forget the arts. I maintained that art at its best reveals to us the fullness of what it means to be human.

At the time I feared the lights would go out all over the world and all forms of culture would sink under the assault of the pandemic. But it soon turned out that we could not live without art and culture after all. It was just that art had to find new ways to reach us, new ways to exist, and artists had to find new ways of making art. For many artists, their homes became their studios. Zoom replaced travel, and virtuality replaced intimacy.

But there is something matchless about live theatre. Nothing quite comes close to the mysterious vitality of living actors and an audience throbbing with anticipation and immersed in the entanglements of a story. And so this weekend something remarkable will happen. After a year and a half of not practising their art in person, a group of actors will be staging at the Young Vic my new play, Changing Destiny. It is set in ancient Egypt and is based on a nearly 4,000-year-old poem called “The Tale of Sinuhe”.

Ashley Zhangazha in rehearsal for Ben Okri’s ‘Changing Destiny’ © Marc Brenner

The play began its life before lockdown, but the writing of it and the intricacies of production took place during it. Most of the process happened on Zoom. Staff had to work from home and the theatre struggled for funding. A curious early obstacle was the shortage of black male actors, who were unprecedentedly in such high demand. Fortunately, we found the excellent Ashley Zhangazha, who had played Ike Turner in Tina: The Tina Turner Musical. He plays alongside the wonderful Joan Iyiola, a veteran of the Young Vic.

The play began as a classic three-act play in the Greek tradition, then was compressed into a two-hander. We wanted this play, based on one of the most popular poems in the ancient world, to be as close as possible to the oldest form of storytelling on the stage, where the play is made up as much from the imagination of the audience as from the suggestive performance of the actors. We wanted an ancient form of theatre, the campfire theatre, alongside the most modern of technological innovations.

But producing a play during lockdown proved quite a challenge. And it took nerves of steel from the intrepid artistic director of the Young Vic, Kwame Kwei-Armah, to manage all the contingencies and devise the most Covid-free environment for the actors to rehearse and the theatre to function. Going into rehearsal required a rigorous daily health check. The rehearsal area was completely sealed off.

The pressure on the actors was enormous. There are only two of them, one male, the other female, playing 100 roles. They rotate the playing of the central role of Sinuhe. This makes it a gender-transcendent performance. To experience the play fully, you have to see it twice, to see what happens when Sinuhe is a man and then a woman.


Joan Iyiola in rehearsals for ‘Changing Destiny’ © Marc Brenner

I first became interested in “The Tale of Sinuhe” as part of my abiding curiosity about the ancient Egyptian civilisation and its relationship to Africa. It seems people have managed to mentally separate Egypt from the rest of the continent. Now, perhaps, is the time for Egypt to be dealt with as part of the broken history of the continent.

But my interest in ancient Egypt is also mythical and spiritual. The poem of Sinuhe is a literary text but also belongs to the mural tradition of Egyptian art. The scribe who copied it had it painted in his tomb. It is a visual poem, a performance to death and immortality.

A casual encounter with Kwei-Armah, who is himself a fastidious playwright, at an event celebrating Nelson Mandela through his prison letters, gave the second impetus for the writing of the play. We were surprised at our mutual fascination for this now little-known Egyptian poem.

After the final draft was accepted, Kwame decided early that he wanted Changing Destiny to be the first play the Young Vic performs as it comes out of lockdown, a play that matches the strangeness of emerging from the long period of isolation with the magic and strangeness of an ancient world. But it has proved as difficult coming out of lockdown as going into it. The production suffered cancellations and postponements and has been a lesson in bringing back theatre in historic times.

From the beginning, though, we were not interested in theatricalising the poem, but in finding an authentic political and ritual drama from it. No play about ancient times can be written that is not a play about today. We can only understand the past through the present. It is the only portal we have. Conversely, we can only understand the present through the past.

The Sinuhe poem reveals profound political tensions in ancient Egypt. It is an indirect account of the assassination of Pharaoh Amenemhat I; and of Sinuhe, implicated in the plot, who had to flee to foreign lands. Contained in the poem are archetypes that have haunted the human imagination.

Prefigured within it are preoccupations with home and exile, with identity, the unknowability of human motives, and those eternal issues of freedom. Right at the heart of the poem is the problem of power, of what to do when an autocratic regime is destroying the fabric of society. Hard as this is to believe, those pyramid-makers had their fingers on the pulse of things that would consume us 4,000 years later.

Kwame Kwei-Armah, artistic director of the Young Vic and director of ‘Changing Destiny’ © Marc Brenner

Ancient Egypt has been marginalised in the story of literature. That ought to change. The tendency in the west has been to begin with the Greeks as if nothing much had been written before. But the writing of Herodotus and Plutarch bears witness to the Egyptian roots of Greek culture, to the notion that the Greeks got some of their gods from Egypt. There is even a fruitful tradition that contends that the ancient Egyptian mystery plays were the real progenitors of Greek theatre.

There are hints in the Greek myths of importations from other cultures. Dionysus has an Asiatic tinge. Many cultures inform the pantheon of Greek gods. In order to overcome enduring Eurocentric tendencies, we need to go back to the ancients to see how myths and mysteries spread from one centre to another. It should cure us of the notion that the roots of western civilisation come from only one place.

The migration of gods and cults and peoples is hard-wired into the story of civilisation itself. “The Tale of Sinuhe”, for this reason, ought to induce in us cultural humility and a sense of wonder. It ought to be widely taught in schools and be as well known as Homer’s Odyssey or The Arabian Nights.

Writing Changing Destiny, I wanted to bathe the audience in this eternal stream. I wanted to divert some of its waters into these divisive times. Whether it be the cruel treatment of migrants at American borders, or the European seas alive with the ghosts of migrants who tried to make it across, or the new immigration bill recently published by the British government, this ancient Egyptian poem, now made into a play, hints that the issue of immigration demands a new way to look at the human story and the human spirit. Not one that demonises out of fear, but one whose understanding comes from the long perspective about the mystery of the human estate.

To August 21, youngvic.org

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China reaffirms plans to beef up oversight of foreign listings

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Chinese politics & policy updates

Beijing reiterated its intention to strengthen oversight of overseas listings on Friday, capping a volatile week during which contradictory policy signals rocked the share prices of Chinese companies.

At its mid-year meeting, the Chinese Communist party’s politburo stated its determination to “improve” the regulatory framework for companies listing shares overseas. It was the first time the politburo, comprised of the party’s top 25 officials, had specifically addressed the issue.

Chinese regulators have been angered by Didi Chuxing’s decision to press ahead with a $4.4bn initial public offering in New York last month, despite their concerns about the ride-hailing group’s data security practices.

Senior party and government officials have subsequently vowed stricter oversight of overseas listings, which will now require clearance from the country’s internet regulator. Didi’s shares have plunged as other Chinese companies cancelled or delayed plans to list outside of the country.

Investor confidence in Chinese tech companies was further dented on Monday when Beijing revealed draconian new rules for the country’s booming private education sector. The share prices of New York-listed tutoring companies collapsed, after which a senior securities regulator sought to reassure financial executives that Beijing was not seeking to ‘“decouple” Chinese companies from US and other overseas markets.

The comments by Fang Xinghai, vice-chair of the China Securities Regulatory Commission, on Wednesday helped stop a broader sell-off of Chinese shares. But they were not enough to prevent a more than 20 per cent monthly decline in US-listed Chinese tech companies.

Chinese officials have shown no sign of reining in their crackdown of the country’s largest tech groups for alleged violations of monopoly and data security laws.

Separately, China’s transportation ministry on Friday signalled an intensification of the measures against Didi and other ride-hailing groups. It said in a statement that companies in the sector must improve compliance over network and data security management to better protect customers’ personal data. Stronger supervision of antitrust practices, as well as improved rights of workers in the sector, was also needed, it said.

The statement did not name specific companies but noted that the government’s transport sector oversight is being directed by President Xi Jinping.

The Chinese government is conscious that the campaigns against tech and education companies could dent already fragile private sector confidence as the government tries to boost slowing economic growth.

Liu He, a Chinese vice-premier and the country’s top economic and financial official, sought to reassure representatives of small and medium-sized enterprises on July 27, acknowledging that they were the “main source” of employment. “The Chinese economy will do well only if SMEs do well,” he added.

While China has rebounded strongly from the Covid-19 pandemic, officials have been concerned by slowing infrastructure investment — an essential driver of the world’s second-largest economy. The politburo suggested it would encourage more fiscal spending and local government debt issuance to accelerate economic growth.

The Chinese government has also struggled to contain a new outbreak of Covid-19’s Delta variant, which has spread across the country from an airport in eastern China.

Additional reporting by Edward White in Seoul



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