Insights

  Recently, the South China Morning Post (SCMP) in Hong Kong published an interview with Professor Mao Zhenhua in the "Open Issues" column with two full pages, recording Professor Mao Zhenhua's judgment and suggestions on the current Chinese and Hong Kong economy. Founded in 1903, the South China Morning Post is not only the best-selling newspaper in Hong Kong, but also one of the most credible and influential media in Asia. The following is a translation of the English interview.       ◎The following is translated from the original English text:   The era of big real estate developers is over Mao Zhenhua is the founder of China Chengxin Group and co-director of the Institute of Economics at Renmin University of China. A scholar and commentator on the Chinese economy, he has been a professor at the School of Business and Economics of the University of Hong Kong since 2022 and was one of the first to warn of potential pressures on Chinese property prices. In this episode of the "Open Questions" series of interviews, Mao Zhenhua analyzes China's struggling real estate industry, reflects on tensions between China and the United States, interprets the highly anticipated Third Plenum of the Communist Party of China, and explores Hong Kong's changing role in the broader economic evolution.   SCMP: China's real estate market is in crisis after a series of defaults by developer Evergrande in 2021. You noted the potential consequences of Evergrande's liquidity problems a decade ago. How do you now assess the impact of the real estate downturn on the Chinese economy?   Mao: Real estate has become one of the biggest issues affecting China's economic operation. China's real estate was once the focus of investment for the whole society. As real estate prices continued to rise, the unique concept of "only if you have a house can you have a home" has become more deeply rooted in people's minds.   Under such circumstances, owning or buying a house has become the "standard" for middle-class families, and even those families who do not have high income capacity are buying houses by leveraging. In a short period of time around 2017, housing prices were pushed to a new high, which was a sign that the bubble was about to burst.   I noticed that Evergrande started to promote sales by offering 20% discounts as early as 2016. It is generally believed that this is only a case of Evergrande, as the private developer faces liquidity problems due to heavy debts and lack of bank loan support.   However, I think this phenomenon is not an isolated case, but rather a universal phenomenon, which indicates a sales problem for the entire industry: housing prices have peaked and will begin to decline. I was also the first in China to raise the alarm that attention should be paid to the downward trend in Chinese real estate prices. I also called on our regulators to conduct more stress tests, including stress tests on the total debt-paying capacity of China's real estate industry and stress tests on the risk exposure that the financial system will face.   Given that the stress test at the time was not sufficient, I think Evergrande’s problems could have quickly spread to other real estate companies, and the policy was not adjusted until about a year later, when many real estate companies were truly on the verge of bankruptcy.   In 2021, I argued that China, like many other parts of the world, no longer needs so many large real estate companies. The oversupply in China's real estate industry will have two far-reaching effects: first, the real estate industry, as a "pillar industry", will not recover, but will gradually decline. For example, in European countries, especially those with slowing population growth, there are almost no large real estate developers in the market because there is already enough inventory; second, the downward trend in real estate prices may lead to other major economic problems, such as the contraction of the household sector's balance sheet.   SCMP: The Chinese government has taken a number of measures to stabilize the situation, including several strong measures announced on May 17. These measures include lowering the minimum mortgage rate and instructing local governments to buy unsold apartments and convert them into social housing. Do you think these responses are working?   Mao: The introduction of these policies has promoted the recovery of transaction volume, but has not completely reversed the trend of falling housing prices. Therefore, these measures have not achieved the expected results.   My suggestion is to limit supply, such as freezing new land supply and new real estate projects. These measures will send a clear signal of "limited supply" to the market, which will help stabilize housing prices. Otherwise, continuing to expand supply will only aggravate the problem rather than alleviate it. Of course, the projects that have already started construction are an exception, because home buyers have already paid the down payment, and the work of "guaranteeing delivery of the house" must be completed.   Real estate investment has declined in recent years, but the scale of real estate development investment and the newly built area of commercial housing are still large. They are much smaller than the peak periods in 2019 and 2020, but still higher than in 2015 and 2016.   As of the end of May this year, the area of commercial housing for sale in China exceeded 743 million square meters, an increase of 15.8% over the same period last year and an increase of 5 million square meters over 2016. I think there is still a long way to go for China's real estate industry to destock. The scale of land acquired by Chinese real estate developers is an astronomical figure. If all the land is used for real estate development as planned, the task of destocking the real estate market will be difficult to complete.   We must abandon the idea that "real estate must be the mainstay of the economy". It will take a long time to digest the current stock of housing. It can be said that the era of large real estate companies is over. Although we will still see some cities upgraded or renovated, the era of large-scale construction is over.   SCMP: How do you evaluate the impact of these phenomena on Chinese families? What do you think of the current level of consumer demand?   Mao: The debt problem of China's household sector is becoming increasingly prominent. In 2007, before the global financial crisis, the ratio of China's household sector debt to GDP, or the household leverage ratio, was about 18.9%. By the end of last year, the household leverage ratio had climbed to 69.3%.   The new debt of the household sector is mainly used to purchase real estate, but as real estate prices fall, the household debt situation has greatly worsened. A 30% or 40% drop in house prices means that home buyers have almost lost their down payment, which is a huge loss and pressure for the middle class. The shrinkage of real estate assets has also affected residents' consumption, thus placing a great constraint on the economy.   The value of real estate assets declines, but the liabilities are rigid, and the mortgage repayments will not decrease accordingly, which results in a deterioration of the balance sheet. The shrinkage of residents' wealth will trigger some psychological changes. For example, consumers will feel that they hold less money and have greater spending pressure, and will need more savings to cope with debt pressure. And when everyone is reducing consumption, insufficient consumption will bring significant constraints to economic operations.   Insufficient consumption is a long-term problem for the Chinese economy. During the period of rapid economic growth, economic growth was not mainly dependent on the domestic consumer market. Of course, domestic income growth also drove economic growth, but the main driving force for growth still came from globalization and international markets. Among the so-called "troika" of growth engines, namely exports, investment and consumption, exports have been the first driving force of China's economic growth for many years. However, with the outbreak of the global financial crisis in 2008, overseas demand shrank, and trade protectionism in many countries rose, and China turned its focus to domestic demand.   But we soon discovered that boosting domestic demand was difficult. Economists don't talk about desire, but rather demand with the ability to pay. When China's GDP grew at a rate of more than 8% or even 10%, residents' income did not keep up with the pace of economic growth. With the current slowdown in overall growth, residents' consumption capacity will be further constrained.   From 2000 to 2022, Chinese households’ final consumption accounted for only about 38% of GDP, lower than the world average of 57.6%. In contrast, the final consumption rate of American households is about 67.5%. The reason is that the proportion of Chinese residents’ income in the national income has been low for a long time. With the decline in asset prices and the contraction of household balance sheets, there have been some problems of consumption downgrade and sinking in economic operation.   SCMP: In order to reduce dependence on exports, the focus of economic transformation has shifted to domestic demand. How do you think China should promote this process?   Mao: It is both easy and difficult to answer this question. China has always had a tradition of attaching importance to savings and wealth accumulation and despising consumption. In recent years, China has made great progress in basic education and medical care, which has brought certain favorable conditions for increasing consumption. But the problem is that the current economic downturn has reduced people's income levels and income expectations. The income of public institution employees, including civil servants, teachers and hospital staff, has begun to decline, and many other industries have also seen layoffs. The reduction in job opportunities has put tremendous pressure on people's income expectations. More importantly, during the impact of the epidemic, many people were out of work for several months, and the income gap formed during this period has not yet been filled.   I have been calling for economic “stimulus” to be provided to those hit by the pandemic in the form of consumption subsidies or cash handouts since 2020, and have since gone further, suggesting that residents should be provided with RMB 10 trillion (US$ 1.4 trillion ) in cash subsidies.   On paper, this is a very large number, accounting for about 8% of GDP, and it also exceeds the red line of 3% of GDP as a fiscal deficit. But in fact, a subsidy of 10 trillion yuan is not an unattainable number. This is equivalent to a subsidy of 7,000 yuan per person, which is about 1,000 US dollars. We know that the United States has distributed thousands of dollars to its residents during the epidemic, and Hong Kong has also distributed the same amount of cash to its residents.   So how do we raise funds for cash subsidies? I think fiscal deficit is one way, but there are other ways. For example, China has a large number of state-owned enterprises, which generate about 4.6 trillion yuan in profits each year. These profits can be transferred to residents through local governments, and half of the problem is solved. If the scale of 10 trillion yuan is impossible, then 4.6 trillion yuan in subsidies is not a small amount.   I think that the current efficiency of using fiscal funds for infrastructure construction is very low, while the benefits and efficiency of directly distributing them to residents are very high, and the impact on enterprises will be better, because only when terminal consumption rebounds can enterprises achieve sales and profits. Therefore, if public funds can be used more to support consumption and increase demand, I support it; but if public funds are used more in inefficient departments and fields, I oppose it.   According to statistics, the role of state-owned enterprises in innovation is still lacking, and market innovation mainly comes from large companies and private enterprises. For example, most advanced defense technologies are based on the technological development of private enterprises, and the situation in the United States is similar. If we do not have a market-oriented environment, private enterprises such as drone manufacturer DJI will not succeed.   So, what is the current outlook for China's startups? The number of new unicorns (startups valued at $1 billion or more) in China has declined in the past few years. China's entrepreneurial environment is facing tremendous pressure. Venture capital mainly relies on industry funds established by the government, while private investment has decreased. At the same time, some policies that are unfriendly to venture capital funds have also emerged, making it difficult for venture capital to exit and for startups to go public or raise funds.   This leaves startups with no choice but to seek investment from government funds, but government funds often require collateral, and startups lack existing assets. Investments by companies such as Xiaomi, Tencent and Alibaba (current owner of the South China Morning Post) in certain areas have promoted innovation, product development and the development of many startups, but these expanded investment activities have also triggered discussions about the "disorderly expansion" of capital. As a result, many large private enterprises are also facing public pressure in the investment field.   SCMP: As competition between China and the United States deepens, the global economy is expected to further diverge. How do you view these issues and how should China respond?   Mao: The most common question when I visited the United States in 2014 was "What on earth has happened in China?" For the United States, China has undergone tremendous changes since the reform and opening up, but these changes do not meet the original expectations of the United States. During another visit in 2017, I found that the United States is basically convinced that these changes are not in the interests of the United States. Since then, the Republicans and Democrats have reached a consensus to contain China, and this sentiment is very hostile. Therefore, in recent years, not only has the competition with China in the traditional economic field increased, but also the confrontation of ideology and values has emerged.   I believe that the great power game between China and the United States is irreversible. For China, after a period of ambiguity, it has also found its own development path very clearly. With the rise of economic and diplomatic strength, China has also formed a development path that is completely different from that of the United States.   The situation between China and the United States is turning into a long-term confrontation. I think our initial assessment of the Sino-US trade war in 2018 was inadequate. The United States has launched trade disputes against almost all of its trade opponents, including allies such as Canada, the European Union and South Korea, but the key point is that we need to pay attention to the difference between the trade war between the United States and its allies and the trade war with China. The trade war with allies is an adjustment of trade relations, while the trade war with China is an all-round competition or even containment.   I think the China-U.S. trade war is heading toward a "new Cold War," and decoupling is somewhere in between. Both sides believe that their values are irreconcilable with each other, so there must be winners and losers.   SCMP: Over the past year or so, there has been increasing concern in the West about China’s overcapacity. Do you agree with this view?   Mao: I think the United States is trying to weaken China's supply chain capabilities and resilience in the name of correcting the trade imbalance between the two countries.   First, trade imbalances are caused by different industrial structures. In other words, if the United States does not buy goods from China, it will have to buy them from other countries at higher prices. Therefore, in my opinion, the "capacity transfer" or "supply chain diversification" measures must be aimed at weakening China, not necessarily strengthening the United States, and the ultimate goal is to reshuffle the world's supply chain pattern.   Second, I think the US and its allies are trying to curb the development of China's advantageous industries, which happen to be China's "new three": photovoltaics, lithium-ion batteries and new energy vehicles. The overcapacity issues surrounding these industries have already attracted attention.   I was a little disappointed that (U.S. Treasury Secretary) Janet Yellen raised the issue of overcapacity as an economist, because economists know that a country's large exports usually exceed domestic demand. For example, crude oil exports from the Middle East are a form of overproduction, right? There is also overproduction of agricultural products in Australia, and the same is true for grain production in the United States. An exporting country must have overcapacity in its domestic production.   China has experienced several rounds of overcapacity and capacity adjustment, so this is a normal market phenomenon. Of course, we must also see some problems in China itself. During the period of economic growth downturn, our demand shrank faster than supply, while supply-side structural reforms, high-quality development and other policy efforts have driven the recovery of supply faster than demand. In particular, due to the reduction in investment opportunities, companies will strive to seize and seize market opportunities, which is one of the reasons why new energy has become an over-investment area in China.   China needs to take more resolute measures to absorb its own production capacity at home, because we may continue to face obstacles in the trade field under pressure from the United States. China should also further enhance its competitive advantages in key emerging industries. For example, if it can continue to achieve technological innovation in the field of new energy, relying on the current cost advantage, it can greatly reduce its dependence on traditional energy such as fossil fuels, which will also change the global energy landscape.   SCMP: As a newly appointed professor at the University of Hong Kong, how do you view the role that Hong Kong will play as China enters a period of economic transformation?   Mao: Hong Kong's role has changed from being Asia's financial center to being a super link between mainland China and the world. Now I think Hong Kong's future development is becoming clearer.   My own judgment is that in the context of Sino-US competition, Hong Kong cannot simply maintain its position as an international financial center. I think the biggest difference between Singapore and Hong Kong is that Hong Kong can provide financial services for mainland companies to enter the international market. Singapore cannot play this role in Southeast Asia because its economic relations with these countries are not as good as Hong Kong's relations with the mainland. But the problem now is that with the reduction of financial transactions between the mainland and the United States, Hong Kong has lost an important source of business, and the mainland's economy is in a period of transformation, which has also magnified the disadvantages of Hong Kong as a financial center.   However, these unfavorable factors have not brought about fundamental changes to Hong Kong's economic structure and common law system. Hong Kong remains the most international city in China and still has many advantages in areas such as certification, testing, and international arbitration, which are irreplaceable by other Chinese cities.   Education is an important area that Hong Kong can develop in addition to traditional industries. Hong Kong has the highest English proficiency in the country and can provide common law training. Hong Kong has five universities on the list of the world's top 100 universities. In fact, the income brought by the expansion of postgraduate enrollment in Hong Kong in the past two years is also considerable. The annual tuition fee for a student is about US$50,000, and their consumption activities in Hong Kong are also an important source of economic growth. Hong Kong should also recruit students from other countries, including developed countries and countries involved in the "Belt and Road Initiative".   Given the current situation of Sino-US confrontation, Chinese scientists and high-tech practitioners in the West may have the desire to leave the United States, but they have concerns about moving to the mainland. These concerns include children's education, international exchanges and wealth security. They are also worried about their investments, so they may choose to go to Hong Kong first. In addition to attracting these technical talents to Hong Kong's universities, it is also necessary to attract large technology companies from China and other parts of the world to Hong Kong.   Some technology companies in the mainland need to attract international talents, but many international employees may be unwilling to immigrate to the mainland. Hong Kong's low tax rate, coupled with the advantages of the common law system and a high degree of internationalization, can meet their needs for environment and life.   With the development plan of the Guangdong-Hong Kong-Macao Greater Bay Area (regional integration), Hong Kong and Shenzhen can complement each other in terms of technological development, so Hong Kong has the potential to build a technology industry. There is a large amount of idle land in the areas where Hong Kong and Shenzhen are connected, and the cost of using it may be lower than that of Shenzhen. Hong Kong can be at the forefront of China's technological development and play a leading role in the world.   Hong Kong is currently in a period of transformation, although it is a passive transformation. One of the short-term problems it encounters is its dependence on finance, but this also provides motivation and opportunities for Hong Kong to explore development in other areas. If the relationship between China and the West improves in the future, Hong Kong will continue to be an international financial center and has the potential to build itself into a technology center.   SCMP: On July 18, China concluded the Third Plenum, an important meeting of the CPC Central Committee held approximately every five years, which sets the direction for China's economic policies. What do you think of this meeting and its outcomes?   Mao: First, we need to understand the background of this meeting. This year's Third Plenary Session is a core meeting of the Chairman's third term, not an occasion for the new leader to announce groundbreaking ideas. Therefore, the central government will not make a huge policy shift, but will definitely make more comprehensive, specific and systematic arrangements for deepening reform and opening up. This was my judgment before the meeting, and the results also confirmed this.   Secondly, I would like to point out that the Decision adopted and issued by the Third Plenary Session of the 18th CPC Central Committee confirmed that China will continue to adhere to the socialist market economic system, give full play to the decisive role of the market in resource allocation, and equally protect all kinds of ownership economies. These contents have dispelled some doubts in the market and society and will have a positive impact on stabilizing expectations. At the same time, the Third Plenary Session of the 18th CPC Central Committee also clearly put forward the work priorities in the fields of national security, ideology and state-owned economy, which can provide a specific framework for future development.   Third, the Third Plenary Session provided guidance for reforms in important areas of China's economy, such as fiscal and taxation system reform. On the issue of the relationship between the central and local governments, the Decision put forward some new ideas, namely, appropriately expanding the "taxation" rights of local governments, including the central government will gradually transfer consumption tax to local governments, etc. Another important message is to vigorously develop science and technology and emphasize the importance of establishing a unified national market.   Overall, I believe that the Third Plenary Session of the 18th CPC Central Committee is crucial to the stability and recovery of China's economy. Continuing to comprehensively deepen reform and opening up will enhance the total factor productivity of China's economy and also help improve the medium- and long-term growth center of China's economy.

Yang Junhao, CFA, FRM, is currently the CEO of CCX Green Finance International and the Vice President of CCX Asia Pacific. Previously, he was a senior investment banker with more than ten years of experience in the financial industry, and worked at Guotai Junan Securities and China Merchants Securities. Dr. Yang holds a Master of Finance from the University of Sydney, a PhD in Finance from the University of Queensland, and is a postdoctoral fellow in Applied Economics at Renmin University of China.   The Third Plenary Session of the 20th Central Committee of the Communist Party of China was held in Beijing from July 15 to 18, 2024.   The plenary session pointed out that opening up is a distinctive mark of China's modernization. We should steadily expand institutional opening up, deepen foreign trade system reform, deepen foreign investment and outbound investment management system reform, optimize regional opening layout, and improve the mechanism for promoting high-quality joint construction of the "Belt and Road".   As a RMB-denominated bond issued by overseas institutions in China, panda bonds have achieved remarkable results in recent years. According to statistics, the issuance volume of panda bonds in 2023 hit a record high, and the annual issuance scale exceeded the 150 billion yuan mark for the first time.   "Starting from 2022, except for the United States, major developed economies including Europe have raised interest rates. China's repeated interest rate cuts have made financing costs low, attracting many issuers to come to China to raise RMB and issue panda bonds." Yang Junhao, CEO of CCXGF International and Vice President of CCXAP, said in an exclusive interview with a reporter from 21st Century Business Herald recently.   Regarding Panda Bonds, Yang Junhao commented that it is one of the important breakthroughs in China's financial reform and opening up. He said that the positive results of Panda Bonds show that the function of RMB as a financing currency is constantly improving, especially in the context of continued foreign investment in China. With the development of the dual market structure of domestic Panda Bonds and overseas Dim Sum Bonds, the domestic and overseas international bond markets have their own characteristics, and the two complement each other and will achieve common development.   The plenary session pointed out that it is necessary to coordinate development and security, and implement various measures to prevent and resolve risks in key areas such as real estate, local government debt, and small and medium-sized financial institutions.   In recent months, the highly anticipated ultra-long-term special treasury bonds have been launched for sale and have been welcomed by the market. Yang Junhao commented that the issuance of ultra-long-term special treasury bonds will optimize the debt structure of the central and local governments, and part of the funds from the treasury bonds will be used by local governments, which can increase the fiscal space of local governments, especially in places with relatively high debt repayment pressure, certain debt risks, and relatively backward economic development.   From the demand side, "Since the beginning of this year, non-bank institutions including insurance, wealth management, and funds have had a strong demand for ultra-long-term treasury bonds. Ultra-long-term treasury bonds not only meet the investment needs of market institutions for ultra-long-term bonds, but also balance the supply relationship in the treasury bond market. At the same time, the supply of government bonds also increases the liquidity of medium- and long-term investments." Yang Junhao added.   Yang Junhao also pointed out that the issuance of ultra-long-term government bonds and policy bank bonds will accelerate in the future. "We expect that the issuance of government bonds and policy bank bonds will reach a peak in the third quarter."   01Non-bank institutions have strong demand for ultra-long-term government bonds 21st Century : On June 14, China's Ministry of Finance issued 50-year special bonds for the first time, with a total issuance of 35 billion yuan. What do you think of the significance of China's issuance of special bonds? What market impacts are expected to be brought?   Yang Junhao : This year's "Government Work Report" mentioned that the ultra-long-term special treasury bonds will be used specifically for the implementation of major national strategies and the construction of security capabilities in key areas. This is China's fourth issuance of special treasury bonds, and the estimated issuance scale this year is 1 trillion yuan.   I believe that the ultra-long-term special treasury bonds release a positive fiscal policy, which will help boost current market confidence and expectations. First, the funds raised from the treasury bonds will be used for scientific and technological innovation, urban-rural integration, regional coordinated development, food and energy security, and high-quality population development. Measures in these key areas will help expand total demand in the short term, and in the long term will help promote the transformation of new and old economic drivers, build a modern industrial system, and develop new quality productivity.   Secondly, I think that in the short term, the issuance of ultra-long-term special government bonds will have a relatively small impact on the fiscal budget, because special government bonds are not included in the deficit, and their issuance is only included in the management of the government bond balance limit for the year. However, it should be noted that the issuance of long-term government bonds will increase the leverage ratio of the central government. According to our preliminary calculations, the issuance of 1 trillion yuan of special government bonds this year will increase the leverage ratio of the central government by about 0.7 percentage points, reaching 25.5% for the whole year.   In addition, the issuance of ultra-long-term special treasury bonds will also optimize the debt structure of the central and local governments. Part of the funds from the treasury bonds will be used by local governments, which can increase the fiscal space of local governments, especially those with heavy debt repayment pressure, certain debt risks, and relatively backward economic development.   It can be seen from the "Government Work Report" that special government bonds will continue to be issued, which also lays the foundation for the proactive fiscal policy in the next few years, which will help boost market confidence, ensure the stability of expectations, and further optimize the debt relationship between the central government and local governments, and reduce the fiscal pressure and expenditure of local governments. The launch of government bonds and the acceleration of special bonds are carried out simultaneously.   From the perspective of market impact, we have already collected some positive signals. Since the beginning of this year, non-bank institutions including insurance, wealth management, funds, etc. have shown strong demand for ultra-long-term government bonds. Ultra-long-term government bonds not only meet the investment needs of market institutions for ultra-long-term bonds and balance the supply relationship in the government bond market, but also increase the liquidity of medium- and long-term investments. Next, we expect the issuance of ultra-long-term government bonds and policy bank bonds to accelerate. It is expected that the issuance of government bonds and policy bank bonds will reach a peak in the third quarter.   Overall, ultra-long-term government bonds send positive fiscal policy signals. Their impact is not only on the bond market, but also on the entire financial market, sending more positive signals.   21st Century: CCXAP Credit Rating Co., Ltd. believes that if the trend of interest rate differential inversion remains unchanged in the next three quarters of this year, the scale of offshore RMB bond issuance should continue the momentum of the first quarter of this year. Could you please elaborate on how the offshore RMB bond issuance market will develop in the future? What are the important influencing factors?   Yang Junhao : The year-on-year and month-on-month data of the US CPI in the fourth quarter of last year showed that the US inflation control was still good. Therefore, the Federal Reserve did not raise interest rates in the first quarter of this year, and even expressed its intention to cut interest rates soon. At that time, the market generally believed that the Federal Reserve would start to cut interest rates in the middle of this year, so the US Treasury yield has been falling, and the bond yields in the market have begun to rise.   However, in the first quarter of this year, the US CPI data always exceeded expectations, which made the Fed a bit passive. The Fed has to control the overall CPI data and meet economic development, and has been unable to finalize the specific time of interest rate cuts. The market's expectations for the first interest rate cut have also begun to move back. Some believe that it may be at the end of 2024, while others believe that the entire channel of interest rate hikes has not yet ended, which has affected the market's expectations for US bonds.   At the same time, China began to introduce a relatively loose monetary policy in the first quarter of this year to reverse expectations of deflation and change the current situation of sluggish consumption. For example, the People's Bank of China announced a cut in the reserve requirement ratio and loan interest rates in January to promote a reduction in overall social financing costs. These policies pushed China's treasury bond yields to continue to decline in the first quarter, further deepening the inverted interest rate gap between China and the United States.   In 2023, about 350 offshore RMB bonds were issued, totaling about 30 billion yuan, of which about 150, totaling about 8 billion yuan, were issued in the last four quarters. According to data from the first quarter of this year, more than 150 offshore RMB bonds have been issued, totaling more than 9 billion yuan, and the year-on-year growth rate has reached 100%. This is the growth momentum we have seen.   I believe that the momentum of offshore RMB bond issuance will continue in the coming year. The Fed's outlook on interest rates will be an influencing factor. If the Fed quickly reverses to a rate cut trend, the RMB financing cost advantage may be weakened.   On the other hand, if the policy level further tightens restrictions on the overseas financing review system for municipal investment companies, then as an important issuer of offshore RMB bonds, its issuance volume will also affect the overall issuance scale of offshore RMB bonds.   02Interest rate differential between China and other countries promotes the issuance of panda bonds "21st Century": Please talk about the relationship between "dim sum bonds" and the internationalization of the RMB.   Yang Junhao : Dim sum bonds first appeared in 2007, and after so many years of development, they have become a major bond variety. The Federal Reserve has raised interest rates seven times in a row in 2022, and the gradual increase in the cost of the US dollar has promoted the rapid development of dim sum bonds.   Of course, the development of dim sum bonds is closely related to the internationalization of the RMB. The opening and development of the dim sum bond market has made the RMB an important currency, which has not only increased the international acceptance of the RMB, but also increased the settlement and savings functions of the RMB.   In addition, as dim sum bonds continue to develop and improve, more international funds will invest in China through dim sum bonds, join the Chinese bond market, and invest in China's overall financial market. This increases the liquidity of the RMB in the international market, especially cross-border liquidity.   At present, the scale of dim sum bonds has increased significantly, attracting many international investors and foreign institutions such as sovereign funds and pension insurance companies to invest in China. Their participation has made China’s bond market more diversified and increased the market’s ability to resist risks. Improved its stability.   With the development of the dual market structure of domestic panda bonds and overseas dim sum bonds, the international bond markets at home and abroad have their own characteristics, which can be said to complement each other and develop together. Among them, dim sum bonds are more conducive to the expansion of cross-border RMB and play a greater role in helping the two-way opening of the domestic capital market. At the same time, the offshore RMB pricing environment is also more conducive to investors' risk management of exchange rate fluctuations.   "21st Century": According to statistics, the issuance volume of panda bonds in 2023 hit a record high, and the annual issuance scale exceeded the 150 billion yuan mark for the first time. Considering the current interest rate environment, how do you think the market outlook for Panda Bonds will develop? How to attract more overseas issuers to participate in panda bonds?   Yang Junhao : Panda bonds have been very popular recently, mainly due to the interest rate differential between China and developed economies in monetary policy. Starting from 2022, except for the United States, major developed economies including Europe have raised interest rates. China's repeated interest rate cuts have made financing costs low, attracting many issuers to come to China to raise RMB and issue panda bonds. This is the main feature of panda bonds, and the interest rate differential is the main reason for its high issuance volume.   We believe that Panda Bonds are one of the important breakthroughs in China's financial reform and opening up. The function of RMB as a financing currency is constantly improving and strengthening, especially against the backdrop of continued foreign investment in China. With the internationalization of RMB, the frequency of RMB use in cross-border payments, foreign exchange reserves, financial transactions, currency swaps and other fields is increasing, and overseas institutions are also more interested in raising funds by issuing RMB-denominated bonds.   Especially since 2023, we have observed that Russia, India, France and other countries have begun to use RMB in foreign trade transactions and investment and financing. Argentina also announced that it would use RMB to repay foreign debt for the first time. These are all very positive market signals.   According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), in May 2024, the RMB remained the world's fourth most active currency in the global payment currency ranking based on amount statistics, which means that the RMB's global payment ranking has remained fourth in the world for seven consecutive months. I think the popularity of panda bonds is not only due to the advantage of interest rate spreads, but also closely related to China's macroeconomic development strategy and China's degree of opening up to the outside world.   03The international recognition of Chinese rating agencies continues to increase "21st Century": How do you evaluate the degree of openness of China's bond market?   Yang Junhao : Overall, since the fourth quarter of last year, foreign institutions’ holdings of inter-bank bonds have continued to increase. Specifically, from September 2023 to April 2024, the cumulative increase in positions held by overseas institutions each month reached 820 billion yuan, setting a new high since February 2022. Judging from the transaction situation, the trading activity of overseas institutions has also increased significantly.   In March this year, the transaction volume through CCDC was close to 2 trillion yuan, of which about 1 trillion yuan was through the "Global Connect" channel and the "Bond Connect" channel exceeded 800 billion yuan. The total volume has increased by more than 500 billion yuan compared with February.   We believe that there are several main reasons for this trend. First, China's fundamentals are relatively stable. The government's relatively loose monetary policy and proactive fiscal policy have led to steady economic growth, which is our biggest advantage. Chinese bonds also have the natural function of diversifying risks and have a low correlation with other types of global assets. This is one of the main reasons why domestic and foreign investors choose to invest in Chinese bonds.   Second, since 2019, Chinese bonds have been included in the Bloomberg Barclays Global Aggregate Index (BBGA), the JPMorgan Emerging Markets Bond Index (EMBI), the FTSE World Government Bond Index (WGBI) and other indices. Therefore, international investors have increased their holdings of Chinese bonds when investing passively, bringing in more international funds, especially institutional investors. This is a very favorable growth.   Third, China’s financial market is relatively mature, and many foreign investors are also very good at using financial derivatives such as swap lines to hedge the risks of new bond positions. This also provides foreign investors with more protection and investment tools. Richer.   Fourth, compared with other emerging sovereign economies, China’s sovereign risk is very low. Recently, as the geopolitical situation has escalated, more and more foreign investors are more inclined to invest in bonds in China.   "21st Century": What is the current social recognition, especially international recognition, of Chinese-funded rating agencies?   Yang Junhao : At present, the international recognition of Chinese-funded rating agencies is constantly increasing. From the perspective of market share, starting from the second half of 2022, with the support of regulatory policies, the business of Chinese-funded overseas rating agencies has grown significantly. In terms of business volume, the number of new customers of Chinese-funded rating agencies has exceeded 200 in 2023, an increase of two times compared with 2022, and the number of existing customers has exceeded 300, an increase of nearly three times compared with 2022.   With the rapid development of China's overseas bond market, CCXAP's business has also achieved significant improvement. As of the end of April this year, our company has more than 200 existing rating entities and more than 30 debt ratings. This also shows the market recognition of Chinese rating agencies.   It is worth mentioning that CCXAP obtained the business qualification from the Hong Kong Mandatory Provident Fund Schemes Authority ("Hong Kong Provident Fund Authority") in March 2023, becoming the first Chinese-funded credit rating agency approved by it. The five rating agencies are all foreign-funded institutions. This represents the recognition of our company by very large investment entities.   The current investment scale of the entire MPF (Hong Kong Mandatory Provident Fund) is approximately HK$1 trillion, of which 20 to 30% is invested in the bond market. With the participation of Chinese rating agencies, I believe that the market areas of Chinese issuers will receive more attention, such as Chinese dollar bonds, and our company will also increase its allocation in this area. I think this is also very helpful for professional investment institutions like MPF to make longer-term development decisions.

Recently, the People's Bank of China and eight other departments jointly issued the "Guiding Opinions on Further Improving Financial Support for Green, Low-Carbon and High-Quality Development of the Yangtze River Economic Belt", proposing to make full use of structural monetary policy tools to support green and low-carbon development. Prior to this, the CPC Central Committee and the State Council issued the "Opinions on Accelerating the Comprehensive Green Transformation of Economic and Social Development" (hereinafter referred to as the "Opinions"), proposing to enrich green transformation financial tools and extend the implementation period of carbon emission reduction support tools to the end of 2027.   Which companies will be given new opportunities by extending the implementation period of the carbon emission reduction support tool? In the process of promoting the internationalization of carbon footprint, what overseas experience can be used as a reference? Recently, Yang Junhao , CEO of CCXGF International and Vice President of CCXAP , accepted an exclusive interview with 21st Century Business Herald. He believes that clean energy, energy conservation and environmental protection, and carbon reduction technologies will continue to receive financial support. In terms of carbon footprint certification, there are still certain barriers between the mainland and Hong Kong. It is a future trend to establish a unified and efficient carbon footprint certification system across the country and abroad.   Yang Junhao , CFA, FRM, is currently the CEO of CCX Green Finance International and the Vice President of CCX Asia Pacific. Previously, he was a senior investment banker with more than ten years of experience in the financial industry, and worked at Guotai Junan Securities and China Merchants Securities. Dr. Yang holds a Master of Finance from the University of Sydney, a PhD in Finance from the University of Queensland, and is a postdoctoral fellow in Applied Economics at Renmin University of China.   Clean energy, energy conservation, environmental protection and carbon reduction technologies will continue to receive financial support   " 21st Century ": What do you think of the quantitative transformation goals in energy, transportation and other areas proposed in the "Opinions"?   Yang Junhao : The Opinions put forward relatively clear time nodes and task goals for the transformation and development of the real economy, and made it clear that it is necessary to promote the green and low-carbon transformation and upgrading of traditional industries. I believe that in order to promote the green and low-carbon transformation of industries such as steel, nonferrous metals, petroleum, and chemicals, it is necessary to further promote clean production technology and equipment and promote industrial process upgrades. At the same time, the Opinions also emphasizes the optimization of industrial capacity scale and layout, the use of national standards to guide and enhance the upgrading of traditional industries, and the establishment of a sound capacity withdrawal mechanism, which is conducive to curbing the blind launch of high-emission projects.   "21st Century": Which companies will be given new opportunities by extending the support tools for carbon emissions reduction to 2027?   Yang Junhao : The carbon emission reduction support tool adopts a direct mechanism of "lending first and borrowing later". The People's Bank of China provides financial support for 60% of the loan principal for eligible carbon emission reduction loans issued by financial institutions to relevant enterprises in key carbon emission reduction areas. At present, the carbon emission reduction support tool focuses on supporting three carbon emission reduction areas: clean energy, energy conservation and environmental protection, and carbon emission reduction technology. We expect that enterprises related to clean energy, energy conservation and environmental protection, and carbon reduction technology will continue to receive greater support. When the carbon emission reduction support tool is extended to after 2027, we also believe that more financial institutions will obtain the business qualifications of the carbon emission reduction support tool. At the same time, carbon financial products and derivatives can be aligned with international standards, especially with the financial instrument standards of the United States and the European Union.   21st Century: What do you think of the Opinion on the formulation of transitional finance standards? At present, the national transitional finance standards have not yet been introduced. What difficulties are there in standard formulation?   Yang Junhao : The scale of the transition finance market is huge and is crucial to the healthy development of the real economy. At present, in the field of transition finance, the market expects that more comprehensive transition finance standards can be issued at the national level as soon as possible. For industries such as steel, cement, building materials, non-ferrous metals, chemicals, aviation, and papermaking, there is currently no unified transition path and standard in the industry, which is also one of the challenges facing transition technology. The formulation of relevant standards requires the active participation of the above-mentioned real industries, especially leading enterprises and industry associations.   Establishing a cross-border carbon footprint certification system   "21st Century": What are the similarities and differences between Hong Kong's green finance development policies and those of the mainland?   Yang Junhao : The development of Hong Kong's green market follows multiple standards, including the Green Bond Principle of the International Capital Market Association and the Green Loan Principle of the Asia Pacific Loan Market Association. At the same time, the domestic market operates according to the assessment guidelines of the People's Bank of China, which leads to differences in the assessment standards under the regulatory system of the two places. In cross-border business, we will also consider green standards and catalogues in other regions, such as the China-EU Common Classification Catalogue and Hong Kong's Sustainable Classification Catalogue, and are committed to promoting the integration of these standards. We firmly believe that unified green and sustainable standards are crucial to the unification of capital market opinions and the convergence of investment decision-making processes.   Hong Kong explored the concept of green earlier than other regions. Thanks to the integration of Chinese and Western cultures, the concept of green environmental protection has been deeply rooted in the hearts of the people. For example, local developers have long focused on zero-emission design in the construction of buildings and commercial real estate, and have chosen environmental protection measures such as lighting and water use. In addition, Hong Kong financial institutions also attach great importance to sustainable development. Some institutions have even established the position of Chief Sustainability Officer (CSO) and a special green finance review committee to promote the greening of the bank's loan issuance and asset allocation. The requirements set up at the board level not only reflect good corporate governance standards, but also demonstrate Hong Kong's in-depth layout and high attention in the field of green finance.   "21st Century": In terms of product carbon footprint, what experiences and practices can Hong Kong provide for reference for the mainland?   Yang Junhao : In terms of carbon footprint certification, there are still certain barriers between the mainland and Hong Kong. Due to the high degree of internationalization of the Hong Kong market, its recognized certification standards have been integrated into the EU system. After completing carbon accounting, many certification agencies can directly connect with the European Carbon Exchange and even attract investment and subscription from EU ESG funds. However, with the continuous development of green finance, I believe that a unified and efficient carbon footprint certification system that spans domestic and foreign countries will be gradually established in the future. This is the inevitable trend and direction of future development in the field of green finance.   "21st Century": What are the specific difficulties in implementing cross-border authentication?   Yang Junhao : There are differences in green finance standards at home and abroad. The mainland has a unique classification system, while Hong Kong used to follow international certification systems such as the ICMA Green Bond Principles. But in May this year, Hong Kong also released a local classified directory. In terms of certification standards, there are significant differences in industry coverage between the mainland and Hong Kong and the international industry. It will take time to verify whether mainland carbon assets can be recognized by overseas investors.   "21st Century": What suggestions do you have for companies to manage product carbon footprints?   Yang Junhao : Most companies may have done quite well in scope 1 and scope 2. However, in scope 3, it is still difficult to obtain data from upstream and downstream companies. In this process, the voice and control of companies in the supply chain are one of the key factors. We are relatively more objective and fair in doing this as an independent third party. Because we can communicate with upstream and downstream companies from a professional perspective, obtain data without affecting the normal production and operation of the company , and convert these data into disclosable standards. This is also the main pain point and difficulty of most companies, and it is also the core of our value service.   "21st Century": How do you evaluate the development of green finance in Mainland China and Hong Kong?   Yang Junhao : The Hong Kong SAR government is vigorously promoting subsidy programs to build a green financial center, attracting many Chinese issuers to come to finance. US dollar financing costs may fall due to the Federal Reserve's interest rate cuts, and the amount of green financial financing in Hong Kong is expected to grow significantly, indicating the general trend of it becoming a green financial center. At the same time, green finance is also booming in the mainland. The People's Bank of China, the National Association of Financial Market Institutional Investors, and the Shenzhen and Shanghai Stock Exchanges have continuously launched innovative products such as green bonds and special loans, and regulators have actively promoted them. At the same time, mainland financial institutions have also begun to proactively deploy green loans and green investments, setting up specialized departments or institutions for overall coordination and allocation. This process not only promotes the green development of the capital market, but also benefits financiers and borrowers, promoting the transformation and development of the mainland's green industry.