Chinese property magnate loses $1 billion in Evergrande panic

The snowball is rolling ............

Best analysis so far over the Evergrande mess was posted by Business Insider:

A selloff in global equity markets Monday suggests investors are reconsidering how sustainable it is to invest in China, renowned economist Mohamed El-Erian said on CNBC.

El-Erian cited Beijing's continued regulatory crackdown and property developer Evergrande, which has been working to avoid defaulting on a massive $300 billion in debt due Thursday. The real estate developer, China's second largest, has reportedly begun offering to repay investors with discounted properties.

"[We] see it because what's happening in China is shaking key tenants of this global investment theme. You know, it's easy to say the Chinese government is trying to strike the balance between one the one hand punishing excessive risk-taking, and, on the other hand, not having a systemic event. That's easy to say. To do is much harder," said El-Erian, chief economic advisor at Allianz and former CEO and co-CIO of bond giant PIMCO.

"And what that results in is people are questioning one of the tenets - which has been the government will always stand behind the financial sector - it's not. Not at least as yet. Now add to that what has been an attack on various sectors … and it's shaking this notion that China is an investable market."

https://markets.businessinsider.com/news/stocks/evergrande-debt-crisis-china-crackdown-markets-mohamed-el-erian-investing-2021-9

This gives me flashbacks to the start of the financial crisis of 2008, when Lehman crashed. It was the first domino, that turned into a world-wide crisis. When it first broke, it didn't seem like much, just a bunch of bankers out of work on the other side of the world. One of my finance friends told me that night that this was really, really bad though. And he was right. Is this a repeat? We're already in the midst of a world-wide crisis, and China's economy collapsing right now will be bad for all of us in the short term. Although, I've felt that the crash of their economy was inevitable at some point, as they mix political ideology with their economy, which isn't a strong foundation on which to build. I'm just not sure if that's happening now, or is still maybe years away.

China had a real estate problem for a long time. Central planning and funding for building means that completion is more important than the reason for each building to exist. Add in bad workmanship, corruption by people who inspect buildings for safety, local politicians taking kickbacks for pushing permits through, buildings that aren't needed and aren't safe for years: https://asiatimes.com/2019/05/china-now-a-kingdom-of-tall-empty-towers/

Panic as 300-metre-high skyscraper wobbles in China

https://www.theguardian.com/world/2021/may/18/panic-as-300m-high-tall-skyscraper-wobbles-in-china

Buildings in China fall down at a much higher rate than elsewhere.

China Bans Tallest Skyscrapers Following Safety Concerns

https://www.bloomberg.com/news/articles/2021-07-07/china-bans-tallest-skyscrapers-following-concerns-about-safety

There are lots examples of small and large buildings falling in China. Hit any non-Chinese video website and you can find hundreds of buildings falling in video.

The CPC seems to have decided to excise the sick and bloated that exploit real estate before China suffers the same fate as Japan.

To cut off these entities at the source and end speculation is better than if left unchecked. To be able to do so takes power. Why isn’t there a bailout?

Evergrande is at the tip of the Iceberg. A $400 Billion difference between Worth and Value ($2.35T - $1.95T) is big but China’s bubble has close to $ 910 Billion or close to 6% of the GDP. This is painful but if left unchecked it could become 20-30% within the decade when Xi would still be in charge.

Why should the government be responsible for cleaning up after speculators? If its impact on the economy affects the people. To allow the fall shows confidence in the healthy economy perceived to be able to absorb the shock.

The difference between China and the US can be seen in its stability and long term planning. Left to continue, the long term effects will be dangerous but let the next person in office clean up the mess. Presidential election campaign strategy planning comes every two years - it’s the economy stupid - and in the end, the name of the game is to stay in power and for four just more years. Just kick the can down the road.

We know Western countries didn't bail-out the small investors and homeowners but the billionaire class who caused the crisis. Is China just as corrupt? So far, it seems not.

This gives me flashbacks to the start of the financial crisis of 2008, when Lehman crashed.

China stands to see a hole of $900 Billion if and when the entire real estate bubble bursts. We may see upto $2.5 trillion of defaults due the domino effect you mentioned. China may see a further $10 trillion due to domino effects around the world. Thats in the neighborhood of $13 trillion or 80% of the GDP. The Global Financial Crisis of 2008 was in the neighborhood of 30.4 trillion or 210% of the GDP.

We know Western countries didn't bail-out the small investors and homeowners but the billionaire class who caused the crisis. 

Use fiscal income from the people to pay for the losses of the rich investors when they lose money and put the country into further debt.

on the one hand punishing excessive risk-taking, and, on the other hand, not having a systemic event. That's easy to say. To do is much harder," said El-Erian, chief economic advisor at Allianz

A top down government is better equipped to do so than one that can’t make its related sectors “suck it up.” China loves to punish to make examples. The US is stuck with having to avoid systemic events happening on somebody’s watch.

But you won't read about any of this inside China:

https://www.bloomberg.com/news/articles/2021-08-28/china-to-cleanse-online-content-that-bad-mouths-its-economy

So let's see, first we get a global pandemic that almost certainly originated in China, the how's and why's cannot be determined because Chinese authorities won't permit an honest and thorough investigation, and now we see a incipient economic calamity coming from the same miserable nation while their government simultaneously tries to censor any negative economic news. What the h3ll kind of nation is China? Maybe this will be what finally forces western nations to abandon China wholesale. Someone needs to back hand Xi Jinping in the face at one of these global meetings and demand honest answers from the CCP.

Just enjoying the view of China rear end lol

I can well see the Chinese government finding a way to prop this company up; it’s too big to fail as its collapse will drag down too large a slice of the economy. Remember the legitimacy of the CCP is based on keeping the population relatively happy and provided for, which is why they always massage the growth statistics. If huge swathes of the population lose their savings in a market collapse, and possibly their jobs and homes the discontent and rebellion they have always feared will become a reality.

This @Septim Dynasty guy has gone incredibly silent these days. i wonder if CCP suddenly threw him in concentration camps.

I hope he will be ok.

The difference between China and the US can be seen in its stability and long term planning.

Stability and long-term planning in China? That's a myth. All Xi and his cronies care about is power - not for China, but for themselves. China has been due for an economic crisis, but Xi will hasten it with his naked power grabs. He will bring China down, and possibly much of the world with it. Meanwhile, the USA has been rather stable in that the same crooks that were in charge before the Lehman collapse are still in charge now. They, too, are busy robbing and destroying their country.

The whole global situation is ready to collapse - all it needs is a spark. If Evergrande isn't the spark, another will come soon enough.

Financial crises are caused by powerful private-sector financial institutions getting excessively greedy and irresponsible. This is no exception. A state takeover seems to be the solution.

the whole global situation is ready to collapse - all it needs is a spark. If Evergrande isn't the spark, another will come soon enough.

The political situation in US and China are both still based on Lincoln’s principle that ‘you can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.’ If the CPC is corrupt and fails to improve people’s lives, enough citizens will eventually realize this and seek to replace it. But CPC’s control of the media and the dominance of traditional media and recently social media in the US, undermine Lincoln’s logic because it prevents people from realizing the truth. Through the monopoly over the media, the CPC and the oligarchy in the US can repeatedly play the blame game and divert and deflect to external threats.

The spark to cause the collapse mentioned will have to penetrate through media in China and in the US.

Evergrande bonds were sold to Vanguard, Blackrock, etc, who parcelled them up nicely and sold them as CDOs to other banks & investors. The dominoes are set up very much like 2008.

Fisher's take on what comes next:

Still, there are many reasons to think a financial crisis won’t follow. For one, China could easily step in. The government, which has increasingly allowed corporate bond defaults (a long-term positive), doesn’t seem likely to actually bail out Evergrande, considering it is a highly leveraged company in an industry the government is attempting to rein in. But that doesn’t mean it couldn’t let the company fail and then make onshore investors, suppliers and workers whole (or somewhere near whole) thereafter. They have done it before, and we think they have many reasons to do it again. China’s single-party government places a high value on social stability to ensure it retains power. That is likely doubly true now, given the celebration of the country’s founding—China’s Golden Week—starts October . Allowing retail investors to take big losses on Evergrande securities—or property they pre-purchased—could foment instability. In some ways, it already has: People exposed to Evergrande are protesting nationwide.

Even if China’s government takes no action at all, we doubt the impact outside the country would be very big. Despite incremental reforms over the years, China’s markets are still walled off from the world to a very large extent. US and global banks don’t have material exposure to Evergrande. According to research from UBS, banks have limited exposure. Higher-risk property developers account for 4.5% of large banks’ outstanding loans and 6.3% of regional banks’.

The chief way a Chinese financial crisis could impact the world economy is if the country entered a recession and sapped demand. But a property market downturn doesn’t look sizable enough to us to generate that. Could it slow growth? Sure. Real estate, renting and leasing activities have accounted for more than 10% of Chinese GDP in 2019 (used to avoid lockdown skew). But a recession? Less likely. When China’s property market hit the skids in 2015, China still grew nicely and generated a chunk of global demand.

[FNs omitted]

https://www.fisherinvestments.com/en-us/marketminder/putting-chinas-evergrande-saga-in-perspective

Evergrande bonds were sold to Vanguard, Blackrock, etc, who parcelled them up nicely and sold them as CDOs to other banks & investors. The dominoes are set up very much like 2008.

China’s markets are still walled off from the world to a very large extent. US and global banks don’t have material exposure to Evergrande. According to research from UBS, banks have limited exposure.

Who's right?

And then you have this layer of added danger, widespread mortgage fraud.

https://www.reuters.com/investigates/special-report/china-risk-mortgages/

Evergrande bonds were sold to Vanguard, Blackrock, etc, who parcelled them up nicely and sold them as CDOs to other banks & investors. The dominoes are set up very much like 2008.

Not so sure about western bank exposure but Chinese banks certainly repackaged their bad debts and sold them as investment products to the Chinese. Aside from bad real estate debt, do not ignore the huge debts run up by municipalities during the Great Recession when Beijing leaned on state banks to lend money for make work projects to keep people employed. After the 2009-2010 lending binge, the Beijing government began imposing strict controls on bank loans to municipal borrowers and real-estate developers. This put Chinese bank managers in a bind. When they could not refinance an unsuccessful project because their lending quota for municipal borrowers was maxed out, they faced the project failing and becoming a bad debt. ”WMPs initially gained popularity as a way to offload loans after the 2009 lending boom. It is anybody's guess if these will be sucked into the vortex with a big Evergrande default. Chinese banks are weak, thinly capitalized and can fail.

I remember watching a documentary years ago about China's "ghost cities" that were built by developers, but remained empty. So this is no surprise to people that were aware of this problem.

Will it lead to a massive global collapse? Probably not. Money does grow on trees. Its called paper.

Financial crises are caused by powerful private-sector financial institutions getting excessively greedy and irresponsible. This is no exception. A state takeover seems to be the solution.

Well..In this case the state is the financial institution..the only way out would be a powerful recession which gets rids of business kept alive by loans.

Stocks lost touch with reality a long time ago. Going up in a pandemic was insane. Evergrande might trigger an adjustment back down to a normal level. Keep your finger hovering above the 'Sell' button, folks. I wonder how this will affect BitCoin - will it be fragged down or be considered a safer harbour?

The financial markets quite like huge swings in the numbers. As long as they were on the ball and sold quickly, they can bank their cash and buy when stocks hit bottom. It keep the artificial profit cycle moving.

Long-term stock holders such as pension funds may just keep holding them, in the expectation they will eventually rise again.

Xi has to decide to what extent he can give the markets a spanking for not being Communist enough. However, he can't let too many people in mainland China lose too much.

HK's wealthy and foreigners are presumably expendable, but too much loss amongst ordinary Chinese citizens (and wealthy members of the CCP) could cause political instability.

He may scare people before intervening and managing the losses.

It's an interesting watch, unless your assets are on the line. This sort of thing can be very tough on ordinary folk caught up in it.

I remember watching a documentary years ago about China's "ghost cities" that were built by developers, but remained empty. So this is no surprise to people that were aware of this problem.

Evergrande is just one of dozens of such companies ready to default. Blowback will be the repercussions suffered by the construction industry. Many of them will not get paid and will not find new work as the whole homebuilding industry contracts sharply. If those WMPs suddenly look like hollow investments we could see something like 2008 all over again. Remember those CDS's and "liars loans"? China has exactly the same problem only even larger than the US had.