Worst Summer Rains In 60 Years Lash Southern China

SOUTHERN CHINA HAS been seeing its heaviest summer rains for 60 years, bringing floods, widespread destruction of crops and more disruption to supply chains.

Hundreds of thousands of Guangdong and Guangxi residents living around the Pearl River delta have been evacuated after a week of persistently high rains. State media have aired footage of people being rescued with ropes and rubber dinghies, and cars floating down streets. Several cities in Guangdong have raised their flood alerts to the highest level.

The rain has disrupted manufacturing and shipping, already suffering under strict anti-Covid measures. Particularly in the more mountainous north of the province, where the flooding is most severe and landslides have happened, businesses were ordered to close temporarily, and public transport was suspended as rising waters approached dangerous levels. The direct economic loss so far is estimated at more than 1.7 billion yuan ($250 million).

To the north of Guangdong, Jiangxi province has also raised its flood warnings. Officials report direct economic losses already reaching 470 million yuan, with 43,300 hectares of crops inundated.

In neighbouring Hunan province, 21,607 hectares have been damaged, and there are reports of landslides and building collapses.

China’s National Meteorological Center warned that downpours could continue for another week, although the heaviest rains are expected to move northwards across central China from mid-week.

In recent years, climate change has made the south wetter and the north hotter and drier.

China Plans Mass Quarantine For International Travellers

CHINA HAS MAINTAINED stringent restrictions on inbound international travel for fear of an imported wave of Covid-19. Travellers who have been allowed to arrive are subject to mandatory quarantine. There is talk that this state of affairs will continue until at least the Beijing Winter Olympics in February next year.

However, in the meantime, it may open one carefully controlled centralised airlock. Late last month, Zhong Nanshan, one of China’s most eminent epidemiologists and one of the architects of its early containment and prevention measures, revealed plans to build a giant quarantine centre in Guangzhou capable of accommodating almost all international travellers entering China and isolating some 5,000 at a time. Residents from high-risk areas locally would also be isolated there. A similar facility is being considered for Shenzhen, Zhong said.

An outbreak of the highly contagious Delta variant is already spreading in the region, and existing quarantine arrangements to isolate travellers in hotels are not working. Further, the domestically-made vaccines appear to be less effective in suppressing the Delta variant than Pfizer and Moderna’s.

The ‘track and trace’ programme in Guangdong has become more stringent, and travel from the province to other parts of the country has been restricted from the start of this month to residents who can show a negative Covid-19 test with the previous 48 hours and need to travel.

The impact on the container port cluster in the Pearl River estuary (Yantian, Shekou, Chiwan and Nansha), a hub for the country’s manufactured exports, has been to extend turnaround times for shipping since late May, with delays of more than two weeks being reported. These delays are now easing, but they remain high and vulnerable to further local Covid-19 lockdowns, adding another bottleneck to supply chains.

Carbon Trading Starts In Guangdong

WHAT IS EXPECTED to be China’s largest and the world’s second-largest carbon trading market has opened for business. First-day’s trading on the China Emissions Exchange in Guangzhou was roughly double the opening day’s volume on its predecessors in Beijing, Shanghai and Shenzhen.

Exchanges in Chongqing and Tianjin, and the province of Hubei are planned to follow in the next few months as Beijing clamps down on CO2 emissions from heavy industry. Beijing is planning to run the seven exchanges for three to five years as pilots for a national scheme.

Companies have to have a carbon permit for every tonne of carbon dioxide emitted. Most permits will be issued for free initially, but companies will have to pay for 3% of their expected emissions in the first year of the scheme, with that percentage gradually rising in the future. The Guangdong scheme covers the province’s big power generators, cement, iron and steel producers, a group of 242 companies that have been capped at 350 million tonnes of CO2 emissions. Textiles, pulp and paper and metals industries will be added later. 

When all the carbon trading markets are up an running they will regulate 800 million tonnes of emissions, equivalent to Germany’s annual emissions. Beijing’s goal is to cut its greenhouse gas emissions per unit of GDP to 40-45% below 2005 levels by 2020, not just to limit the effects of climate change, but also as part of its drive to become more energy efficient and to deflect the negative criticism that comes with being the world’s biggest polluter.

Guangdong Debt, Cooked Books and Pyramid Schemes

In the first five months of this year, the GDP of China’s southern Guangdong province grew by 12.9%, official data shows, while its industry’s electricity consumption fell by 0.1%. Either Guangdong businesses have made a remarkable breakthrough in energy efficiency, or somebody is cooking the books.

Provincial lawmakers think it is the latter. With unusual openness they have challenged the accuracy of the provincial government’s GDP numbers. At the same time they have questioned the province’s reliance on land sales for revenue to service its debt, causing it to borrow evermore to pay the interest on old debt, and tying itself to the cyclical fortunes of the real estate market.

It is this latter concern that that raises the larger red flag to this Bystander. If government finances in as prosperous and progressive a province as Guangdong are raising such concerns, how deep are the similar problems elsewhere?

The strain on Guangzhou’s purse is increasingly evident. Debt plus interest due this year will eat up 20% of the province’s estimated income for the year, a ratio that triggers alarm bells among lenders everywhere. The provincial government’s total debt to income ratio hit 100% as of end-June. Banks have become reluctant to lend to the province, even though in May central government told state banks to be accommodating in their lending standards where necessary.

Beijing has become increasingly jittery about the ticking time bomb of the country’s local government debt. Last month, it ordered a national audit to be conducted. The last time it conducted such an exercise, in 2010, it came up with a number equivalent to 27% of China’s GDP. Unofficial estimates put the ratio now at 40% of GDP. That translates to 20 trillion yuan, or $3.5 trillion of indebtedness.

It is also reaching the point of a pyramid. Local government borrowing, mostly to finance the infrastructure growth that powered decades of double-digit growth, and since the global financial crisis of 2008 to forestall a too-rapid slowing of that growth, has become unsustainable. Investment projects, often conducted through special investment vehicles (SIVs) to get round restrictions on direct local government borrowing, are not providing sufficient, and in many cases no returns to cover their cost of capital, typically a bank loan secured against anticipated land sales.

An IMF study published in April found that four out of five cities and two out of five counties had secured infrastructure financing against future land sales. We shall pass over the social stability risks involved in appropriating the land for such sales to note that provinces and municipalities are having to borrow anew to repay principal and interest on their existing debt. When confidence tricksters do it, it is called a pyramid scheme.

They tend to come tumbling down in the end. We don’t for a minute think Beijing would let matters get to that point. China has bailed out its big state owned banks before in the 1990s after they had had to bail out local governments. Older hands may remember the’ 90s version of SIVs, provinces’ international trust and investment corporations.

Beijing has the wherewithal to do so again if necessary. The political will to do so would quickly be marshaled in the face of the potential social unrest.

Meanwhile, China has been slowly moving towards establishing a muni-bond market to provide an alternative for provinces to bank borrowings. Capital markets have a Darwinian approach to credit worthiness which few local governments would survive as things now stand. Hence Beijing’s caution and issuance blessing for only those administrations that can muster an AA+ credit rating or better.

For its part, Guangdong plans to issue a record $12.1 billion yuan of bonds this year, a 40% increase on last year’s issuance. That, though, is as much a sign of the size of the problem as a solution.

A Big Test For Little Hu

Hu Chunhua (right) has already been pencilled in by China long-term watchers as a likely successor to President Xi Jinping in 2022. So Hu’s appointment as Party boss in Guangdong is particularly noteworthy. It not only takes him from one end of the country to the other–his most recent post was as Party chief in Inner Mongolia–but it also sets him atop one of the highest profile provinces. This will let him broaden his experience and prove his abilities in a big province. Guangdong is China’s largest provincial economy, about the same size as Holland’s and four times the size of Inner Mongolia’s.

It will also test Hu on a bigger stage and under a harsher spotlight. Hu, who as a protege of outgoing President Hu Jintao is known as little Hu, earned his stripes running under-developed inland places with ethnic minorities considered tough to govern. Rich, coastal and relatively liberal Guangdong, with its large migrant population and manufacturing rather than resource-based economy (Hu has long connections with the coal industry), will present a new set of administrative challenges. Public expectations of his performance, set by his predecessor Wang Yang, who is moving on to an as yet unnamed job following his unsuccessful bid for a place in the Politburo, will also be very different. Hu will have to demonstrate not only his competence but also his ability to manage how that competence is perceived. He is not only being groomed. He is also being tested.

Catch 22 At Wukan

The Party has a thin line to walk in dealing with the outbreak of social unrest in Wukan, the Guangdong fishing village that has been in revolt since September over allegedly illegal land acquisitions by local officials. Authorities are laying siege to the rebellious village — a coastal fishing community of some 20,000 people within Shanwei township some 150 kilometers northwest of Hong Kong– following further demonstrations after the death this week of one of the protestors’ leaders, Xue Jinbo, in disputed circumstances while in police detention.

With no food or fuel being allowed into Wukan and their fishing fleet blockaded, villagers say they have supplies to hold out for 10 days. Internet connections have been severed and the electricity supply reportedly threatened to be cut off.

An attempt by armed police to reenter the village last weekend was rebuffed. With foreign reporters in the village and the protests gaining worldwide attention, regardless of internal censorship of the events, authorities cannot readily storm the village to retake it by overwhelming force. Instead they are trying carrot and stick: a promise of an investigation into the land transactions and the removal of a couple of local officials, but also stern threats of punishment for the protests’ leaders.

Yet rounding up the usual suspects is no longer an adequate response on the part of the authorities. Thousands of villagers, who were promised a similar investigation after a demonstration in November, are so far standing firm (and their organizers demonstrating global media savvy). But blockading Wukan starts a countdown clock for ending the stand-off one way or another.

Few demonstrations have found the spotlight as Wukan’s have, or been allowed to escalate as far, but the discontent that provoked them is not uncommon. Across the country, villagers accuse local officials of colluding with developers and illegally confiscating collectively owned land without offering fair or any compensation. During the November demonstrations in Wukan, one protester claimed that local officials had pocketed 700 million yuan ($110 million) from selling land to developers for factories, while each villager received merely 550 yuan ($86) in compensation.

Land disputes have become one of the leading causes of the tens of thousands of large-scale protests that occur in China every year. Violent confrontation between Chinese and their government is becoming more frequent. In September hundreds of villagers overturned police cars and besieged government buildings in Wukan in protest against the land seizures, to which police responded with force in equal measure.

Earlier this month, Zhou Yongkang, the country’s security chief, warned that the economic slowdown could lead to a rise in social unrest, and told local party and government officials to deal with potential conflicts to minimize social unrest. Guangdong has seen its share of protests by factory workers in the past year, but none proved as difficult for authorities to deal with as the restiveness in Wukan, largely because of the systemic local corruption involved in most cases of alleged illegal land seizures.

Corruption is one of the “four dangers” that President Hu Jintao warned against at the Party’s 90th birthday bash in July. Wukan’s residents have appealed to Beijing for justice. Central government may well have to descend from on high to resolve the situation, but that is likely to mean that it will not end well for either local officials or the villagers’ leaders. Yet Beijing faces a Catch-22: social unrest has to be put down because it is a threat to its rule, yet so is suppressing a widespread and legitimate grievance on the part of its citizens, who do not see objecting to the corruption of local officials as a criminal act.

Shenzhen Joins Pilot For China’s Carbon Trading Market

Shenzhen has been added to the list of provinces and municipalities that will pilot China’s proposed carbon trading market. That takes the initial set to seven. The participation of Beijing, Chongqing, Shanghai, Tianjin, Hubei and Guangdong has been known since the summer. An official with the National Development and Reform Commission confirmed the go-ahead with the pilot scheme to Xinhua, but otherwise details remain sketchy. Central government has still to set overall carbon discharge reduction targets, which are a prerequisite for establishing the national carbon trading market that has been pencilled in for a 2015 launch.

By then, China’s goal is to have cut carbon dioxide emissions per unit of GDP by 17% from 2010 levels, according to a white paper on climate change issued this week ahead of the UN’s forthcoming climate change talks in Durban in South Africa. A reduction of that magnitude will be a tough ask given the pace of the economy’s growth. The pilot carbon-trading scheme is expected to start in 2013.

Debt Takes Its Toll

Yet another rumble of local-government debt trouble. After a three-year highway building boom across China, outstanding debt for toll-road construction is 2.2 trillion yuan ($346 billion), according to numbers compiled by Caixin. That is much higher than the 1.3 trillion yuan outstanding at the end of last year counted by an official audit published earlier this year covering 16 of China’s 29 provinces. Banks have provided 90% of the lending. Toll roads in Guangdong account for 10% of the total, at 227 billion yuan, with another eight provinces collectively accounting for a third more, the Caixin report says.

The danger lies in tolls barely raising sufficient revenue to service the debt. China’s toll roads account for 95% of the country’s 74,000 kilometres of highways, such as the Guilin-Beihai Highway shown in the Xinhua picture above. Yet the audit found that they generated only 170 billion yuan in revenue last year, with just four provinces and municipalities a profit at the tollgates. Guangdong, Caixin says, collected 789 million yuan in road tolls last year and had to use all but 19 million of that on debt repayment. Other provinces are having to take out new loans to pay off old ones.

The audit found that more than half of new highway loans were being used to that end. That is getting more difficult for provinces to do as Beijing tightens the liquidity spigot, leaving some highways uncompleted as construction comes to the same dead stop as their funding. Meanwhile, other political constraints don’t give provinces much if any scope to raise tolls.

China’s Muni-Bond Market Brought Back To Life

This Bystander noted last year that moves were afoot to develop a municipal bond market as a way to put the financing of provincial and local governments on a more transparent footing, and to wean it from the off-balance sheet financing via captive investment vehicles that local authorities have resorted to get round restrictions on official borrowings. As of June, 2010, these captive investment vehicles accounted for 7.7 trillion yuan of local government borrowings (more than three-quarters of the total), and had become some of the most riskiest parts of local government finances in the eyes of the finance ministry.

Now, Zhejiang and Guangdong provinces and the municipalities of Shanghai and Shenzen have been given permission by the ministry to issue three- and five-year bonds on a trial basis. It is the first such direct muni-bond issuance sanctioned in 17 years.  Collectively the quartet are expected to be capped at 20 billion-30 billion yuan first time round. (Update: Shanghai, 7.1 billion yuan; Guangdong, 6.9 billion yuan; Zhejiang, 6.7 billion; and Shenzhen 2.2 billion yuan.) That would be one-tenth of the annual issuance now made by the finance ministry on behalf of local governments to help meet funding shortfalls.

Though the bonds will issued by the four authorities, they will be closely supervised by the ministry. The proceeds of the sales will be kept in a special account at the ministry, which will oversee the payment of interest and principal, and, in effect, guarantee the bonds. The ministry will also have a big say in what the money raised can be used for. Zhejiang is expected to be first out of the gate, raising funds for infrastructure projects. If all goes well, other provincial and city governments will be allowed to follow suit.

Beijing banned local governments from selling their own bonds–and from running deficits, come to that– in 1994 when it became concerned local authorities were running up huge debts they wouldn’t be able to pay. Now policymakers are concerned that local authorities have again borrowed too heavily in the wake of China’s post-2008 global financial crisis stimulus, and that in a slowing economy and cooling property market they will again struggle to repay their loans. Worse, that could trigger a banking crisis.

While the immediate priority is to clean up and deflate the local government debt bubble before it can go damagingly pop, the development of a local-government bond market is in Bejing’s long-term plan for developing its domestic financial markets. Beijing is moving cautiously, however. It remains wary of giving provinces more control over their own development, at the expense of central control. The initial quartet are trustees, so to speak, and financially sound enough to test the waters without too great a risk of mishap.

Beijing will still have to guarantee the debt of many provinces for sometime to come, and there is a real risk that some of the weaker provinces won’t able to maintain their debt service. As Liu Mingkang, head of the banking regulator, noted earlier this week, there are serious concerns about the levels of local government debt. “We cannot deny that local government financing platforms have not been managed well,” he said.

A quick glance west to Greece or east to California reveals the trouble fiscally wayward and heavily indebted national and local governments can get into. Having prided itself on avoiding the worst excesses of the prelude to the recent global financial crisis, Beijing doesn’t want to go there in its aftermath.

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Drought Lingers In Guangdong

Though nothing on the scale of the arid weather experienced on the North China Plain earlier this year, a lingering drought northwest of Guangzhou has left some 60,000 people short of drinking water and damaged 160,000 hectares of crops. Water levels in the Beijiang River around Qingyuan City have fallen to the point where boats in side creeks have been left stranded on dry ground (pictures here). Since last October, Guangdong has received almost half as much rain as normal. No break in the dry weather is expected for at least a month.