China central government suspended the reporting of young unemployment statistics on Tuesday, as its central bank slashed a crucial interest rate to stimulate sagging economy.
A slew of disappointing numbers in recent months has shown a slowing of China’s post-COVID recovery, with youth unemployment reaching a new high of 21.3 percent in June.
The National Bureau of Statistics announced on Tuesday that it will no longer issue unemployment data by age group beginning this month, citing the need to “further improve and optimise labour force survey statistics.”
“The release of urban unemployment rates for youth and other age groups across the country will be suspended beginning this August,” National Bureau of Statistics spokeswoman Fu Linghui said at a press conference.
Many analysts have advocated for a large-scale recovery plan to increase activity as symptoms of an economic downturn have piled up in recent weeks. However, for the time being, authorities are focusing on selective initiatives and declarations of support for the private sector, with few concrete steps.
The central bank reduced the medium-term lending facility (MLF) rate, which is the interest rate on one-year loans to financial institutions, from 2.65 percent to 2.5 percent on Tuesday.
Lowering the MLF rate lowers commercial banks’ financing costs, enabling them to lend more and potentially increasing domestic consumption.
China’s Retail Growth is Slowing
The suspension of youth unemployment data came as Beijing announced a slew of dismal economic figures for July on Tuesday.
According to the National Bureau of Statistics, retail sales increased 2.5 percent year on year in July, down from 3.1 percent in June and falling short of expert projections.
In recent weeks, Chinese leaders have pushed to promote domestic consumption, with the State Council unveiling a 20-point plan last month to encourage consumers to spend more on industries such as autos, tourism, and household appliances.
The country’s senior officials have warned of “new difficulties and challenges” as well as “hidden dangers in key areas” for the economy.
According to the NBS, overall unemployment rose to 5.3 percent in July, up from 5.2 percent in June. According to the NBS, industrial production increased 3.7 percent year on year in July, down from 4.4 percent in June.
According to current data, China may struggle to meet its five percent growth objective for the year. According to official estimates, the world’s second-largest economy increased by only 0.8 percent during the first and second quarters of 2023.
China’s Financial Sector Takes a Hit
After failing to make payments on various high-yield investment packages, one of China’s leading private wealth managers has raised new concerns about the country’s shadow banking business.
The turbulence at Zhongzhi Enterprise Group Co, a shadowy financial conglomerate that oversees approximately 1 trillion yuan (US$138 billion), came to light when several of its corporate clients revealed late payments by a trust unit. According to persons familiar with the case, the banking regulator has formed a task team to investigate concerns at Zhongzhi, indicating that Chinese officials are concerned about potential contagion.
While poorly recognised outside of China, Zhongzhi is one of the country’s largest players in the $2.9 trillion trust business, which combines commercial and investment banking, private equity, and wealth management. Firms in the sector pool savings from high-net-worth individuals and corporations to make loans and invest in real estate, equities, bonds, and commodities.
Chinese trusts have been under scrutiny for years, ever since regulators began cracking down on the country’s shadow banking abuses in 2017. However, Zhongzhi’s problems have arisen at a particularly sensitive time for investors, many of whom are already concerned about the status of the world’s second-largest economy and property market.
Country Garden Holdings Co, one of the country’s top developers, is on the verge of bankruptcy, while loans given by Chinese banks plummeted to their lowest level since 2009 last month, indicating dwindling demand from businesses and consumers. Last year, Zhongzhi’s trust unit invested in real estate projects, depending on a market bounce that has yet to materialise.
Boosting investor confidence
The convergence of hazards is putting additional pressure on Xi Jinping’s leadership to boost investor confidence. The CSI 300 Index fell for the fifth time in six sessions on Monday, and the yuan slid towards its worst level this year.
While the revelation of the Zhongzhi task group provided some relief to markets, analysts at JPMorgan Chase & Co warned that the turbulence could add to a “vicious cycle” for real estate financing in China.
“The biggest problem now is how to isolate the risks associated with Zhongzhi group so that confidence in the entire trust industry does not collapse,” said Shen Meng, a director at Beijing-based Chanson & Co. “If the situation worsens, the scale of the risks will be no less than when a major property developer defaults.”
According to data provider Use Trust, 106 trust products totaling 44 billion yuan defaulted this year through July 31. By value, real estate investments accounted for 74%.
Three companies, including Zhongrong International Trust, stated late Friday that they had not received payments for items issued by entities affiliated to Zhongzhi. Xie Zhikun created Beijing-based Zhongzhi in 1995 and grew it into a vast empire. In 2021, Xie died of a heart attack, precisely as Covid-19 and pandemic lockdowns slowed China’s economy and exacerbated instability in its capital markets.
While his replacement, Liu Yang, has pledged to maintain the company’s strategic focus on industrial and asset management sectors, the economic recession and property-market fall have weighed on its operations.
Investors with outstanding investments
Zhongzhi is the second-largest shareholder in Zhongrong Trust, owning around 33% of the company. According to its website, the company also has shares in five other licenced financial institutions, including a mutual fund manager and two insurers, and has invested in five asset management companies and four wealth units. It also owns listed firms and has 4.5 billion tonnes of coal reserves among its industrial operations.
According to Use Trust data, Zhongrong Trust alone has 270 goods totalling 39.5 billion yuan due this year. The average yield on these products was 6.88%, compared to the bank’s benchmark one-year deposit rate of 1.5%. The trust corporation has revealed nothing to the public about its predicament, though it has stated that it is aware of fraudulent letters being circulated on social media claiming that the company is no longer in business.
According to a statement on its website, the corporation has denounced them to authorities. In one unsubstantiated letter circulating on social media, a wealth manager at Zhongzhi apologised to his clients, claiming the group’s wealth arms had decided to suspend payments on all products since mid-July. According to the letter, the problem involves more than 150,000 investors with outstanding investments totaling 230 billion yuan.
The extended property collapse in China has dragged previously sound property developers to their knees. The industry is trapped in a vicious loop in which faltering developers put off homebuyers, crimping companies’ financial flow. In July, home sales fell by the most in a year.
The missing payments demonstrate “how the real estate sector’s liquidity problem can cascade into other sectors, including the trust industry,” according to Gary Ng, senior economist at Natixis. “It would not be surprising to see more trusts with a high asset allocation towards real estate face payment issues.”
The National Financial Regulatory Authority, Zhongrong Trust, and its parent company, Zhongzhi Group, did not answer to demands for comment. In announcements issued Friday evening, Nacity Property Service Co. and KBC Corp. were the first to report on Zhongrong International Trust’s delayed payments. KBC, a carbon products manufacturer, claimed in a statement to the Shanghai Stock Exchange that the delayed payments were due to a 60 million yuan investment with Zhongrong Trust.
Another publicly traded firm announced on Friday that payments on one wealth product purchased from a Zhongzhi unit had fallen behind this month and that it would take legal action to recover investment losses.
According to its annual report for the year, Zhongrong Trust, which controlled 786 billion yuan in assets as of December 31, claimed its businesses faced a “relatively high level” of credit risks in 2022 as counterparties’ liquidity pressures and refinancing issues weakened their capacity to honour payments. According to Zhongrong Trust’s annual report, real estate accounted for 11% of trust assets, followed by industries (42%), and financial institutions (33%).
Regulators earlier punished the company 200,000 yuan for investing in a property project that lacked required approvals, and the company promised to enhance compliance. Last year, trust companies such China Zhongrong Trust and MinMetals Trust Co purchased holdings in at least ten real estate projects, anticipating that incomplete residences will eventually provide enough income to pay off some of the $230 billion in property-backed funds they offered to investors.
On Monday, China’s benchmark CSI 300 Index slid 0.7%, while Hong Kong’s Hang Seng China Enterprises Index sank 1.6%. The Chinese yuan fell 0.2% against the US dollar.