Evergrande – China Property Collapse?

This needs a bit of a Dig Here! and a bit of a think. I’ve not seen this guy’s stuff before. It just showed in the “recommended” line on Roku Youtube. The basic thrust of it is that a company named Evergrande is in default and it’s a whale in the Chinese Housing Market while China has $62 Trillion(!) in market cap of housing / real estate. Plus other housing builders are also on the rocks.

The assertion (which is not proved) is that as Evergrande goes, so goes the Chinese Housing Market and as Chinese Real Estate goes, so goes China, and a China Collapse takes down the world due to our dependence on them for global production.

I think there are links in this chain that are not proven (but look plausible) and that there are potential “firebreaks” that governments could provide that are not considered. OTOH, with global central banks pegged at zero interest rates or near zero, not a lot of those firebreaks are likely to work well. “Liquidity Trap” writ global.

It looks really bad, but I don’t have time ATM for a Deep Dive, so this is just a shallow toe in the pool.

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LEAKED REPORT: It’s Far Worse Than We Imagined! China’s $62 Trillion Housing Bubble

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My biggest concerns would be:

1) China needs a “Wag The Dog” so invades Taiwan to blame any financial collapse on Western Instigated War… as is often done.

2) Western financial powers have managed to put their dangly bits into Chinese Real Estate and the contagion of this STD (Structural Transmissible Decay) goes global.

I’d not care much at all if China augers in, as long as it doesn’t take down EU, UK, Australian and USA financial systems and banks in the process. I figure Japan is smart enough to not be on the hook in China, and likely a fair number of Muslim Countries are similarly isolated (but who knows… another Dig Here! on degree of China real estate exposure globally is needed).

This link makes it look plausible, perhaps even probable:

https://www.orfonline.org/expert-speak/will-chinas-evergrande-contagion-spread-beyond-real-estate/”

RAISINA DEBATESOCT 13 2021

Will China’s Evergrande contagion spread beyond real estate?
ABHIJIT MUKHOPADHYAY

The fear that the recent real estate sector crisis in China could stretch into the international commodity market and domestic consumption market looms large

Buried under a huge US $305 billion debt and almost on the brink of collapse, China’s real estate giant Evergrande Group defaulted twice on payments to offshore bondholders in September 2021. More damning is the fact that the group is yet to announce any plan to repay those investors.

This has sent shockwaves through financial markets across the globe.

So a load of the debt in default is external global debt in $US. That’s not good. 1/3 $Trillion is a bit stunning too.

China has been the principal driver of the post-pandemic global recovery. It is the first country returning back to the pre-pandemic output level. In the process, China became the single-most important factor in the global commodities market upturn.

We’ve had a post-pandemic recovery, have we? Um, “facts not in evidence” I’d say. “Ongoing Malaise” seems more accurate. 2 weeks to slow the spread has become 2 years to increase mandates… Worker shortages and walkouts are increasing.

China’s extended boom run in the property sector started in the mid-1990s and continued unabated. As a result, almost three-fourth of the country’s household wealth is now engaged in housing. With large offshore investments in Chinese high-yield (HY) real estate bonds, financial markets in other countries now are exposed to substantial risk of contagion.

Is “Extended Boom” now the term of art for “Incredibly Inflating Bubble”? /snark;

And it looks like The Usual international “financial wizards” are up to their gizzards in it. No wonder The Dimocrats are looking to mint a $1 Trillion coin…

It is no wonder that China HY bonds index tumbled in the aftermath (Figure 1). Foreign investors have taken out US $8.1 billion out of the Chinese debt portfolio in September—the largest outflow in the last six months.

So $8 Billion out, and “only” about $298 Billion to go… The Graph has the usual downward slope at about 45 degrees with a 23% loss so far, If I’m Reading It Right (mice-type…)

The empire of Evergrande Group spans over 1,300 housing projects in nearly 300 cities, a football team (Guangzhou FC), an island holiday resort with 58 hotels and 15 under-construction Chinese Disneyland-like theme parks. This empire is erected mostly by borrowed money from domestic and international markets. Currently, it has 800 unfinished residential buildings, numerous unpaid suppliers, and over a million home buyers who have partially paid for their properties.

The group is also in wealth management products, and those are mostly sold to its own employees. Under the current circumstances, the group would be unable to discharge the guarantees on many of these products. For obvious reasons, insider selling has started, if grapevines are to be believed.

That’s a whole lot of pissed off folks panic ridden and looking for an exit. This will not end easily or soon.

Evergrande used to bid for land at prices significantly higher than market prices. Apparently, this is a common practice amongst Chinese companies. Evergrande excelled at that on its way up to becoming the property giant selling home-ownership dreams to the Chinese middle class. Earlier this overinflating price did not affect the property developers as the risks were finally transferred to the flat buyers and the banks that financed those purchases.

So, OK, any inventory of land and “under construction” are at over market costs and will not yield relief. Got it.

This model has worked fine for households, real estate developers, banks, and local governments up until now because housing prices were soaring up. Rising residential property prices took care of artificial overinflating of land prices. However, this was bound to affect affordability of home and household debt at some point. And it did this time.
[…]

It then goes into how the “Covid Pandemic” dumped cold water on this hot bubble and once deflation sets in, it doesn’t stop very soon.

And, of course, there’s a Government Intervention angle:

This all started in 2020, when the People’s Bank of China (PBC) and the Ministry of Housing announced new financing rules for real estate companies, often called as the “three red lines”. Those were –

) a 70 percent ceiling on liabilities to asset ratio, excluding advance proceeds from projects sold on contract,

) a 100 percent cap on net debt to equity, and

) a cash to short-term borrowing ratio of at least 1.

The objective of imposing these borrowing restrictions primarily was to prevent a housing bubble and a subsequent disastrous bust. China was eager not to repeat Japan’s mistake of not controlling excessive credit in the 1990s and not shutting down insolvent borrowers quickly. Those mistakes caused long-term damage to Japanese growth.

However, Evergrande’s illiquid portfolio of property projects are financed by more than US $300 billion of domestic and international liabilities, and 80 percent of these are short-term. The group has a huge liquidity mismatch.
Apparently, the cash flow plays a vital part in the growth of these Chinese real estate companies that almost operate like a credit-driven Ponzi scheme. So, like other companies in the sector, Evergrande also struggled to abide by those new “three red lines”. Even in September 2020, there had been reports of a possible cash crunch at Evergrande, leading to a brief liquidity scare.

In the Chinese property sector, therefore, symptoms of stress were bound to appear. Fantasia Holdings has defaulted on a US $206 million bond payment in the beginning of October 2021. Sinic Holdings, another developer, now has to undergo a rating downgrade after some of its units missed interest payments on onshore financing arrangements.

And others in the sector are getting the whack too.

The article then goes on to point out softness and early roll over of various commodities. Given the global slow down and a collapsing Real Estate build demand, I’d expect that to happen. IF this expands to be a general recession in China (and thus the globe) it will likely be brutal on commodities used in building.

OK, I’m busy boxing up the house and clearing the yard trees from the roof so the roofers have a free field. I don’t have the time ATM to Dig Here!, but clearly it needs it. Some time in the next day or three maybe I’ll find time while resting between ladder & tree sessions.

“May you live in interesting times”… Right when you think you are going to just move to Florida, you get a Pandemic, a “death in the family”, a “construction zone prep”, prohibitions on flying, strikes pilot shortages and “weather” events, and so much more. AND I’ve been running down my “Prep Stores” preparatory to moving. Maybe I need to revisit that particular decision.

Then again, consider the alternatives… At least I’m not bored or cold and stiff. (I know, thin tea that… But it could be worse, we could have an idiot with dementia for POTUS and China running the US Government via proxy… Oh, wait!)

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money, Emergency Preparation and Risks, Political Current Events, World Economics. Bookmark the permalink.

7 Responses to Evergrande – China Property Collapse?

  1. another ian says:

    FWIW

    “Is It Ever To Be Grande?”

    https://market-ticker.org/akcs-www?post=243645

  2. David A says:

    All thoughts appreciated on China, global economy, US dollar as an asset, etc…
    There is speculation that Xi wants this to happen, having made comments about housing property needs to be affordable. Not sure what China’s end game here is, but this feels orchestrated. How it will impact global economics, ???? Lots of stuff happening as EM alludes to. Any one of a dozen things would normally have been headline leading news for weeks. My view is regardless of how clever these Blackbeard’s think they are, chaos will take over and things will spin unpredictably.

  3. Graeme No.3 says:

    Xi is in trouble, what with a collapse in the housing bubble, trouble with not enough coal and gas to get through the coming winter and adverse reaction from foreigners. The last he can laugh off.
    As for his position someone described it in terms of a duck floating on a pond. Not much apparently happening on the surface but frantic paddling below water. He has already had another purge of Party members this year, indicating some opposition.
    His big problem is keeping the lights on and people warm during what looks like being a cold winter. At least he is taking measures right now unlike certain western “leaders” who think that the Glasgow Climate Conference is important.

  4. jim2 says:

    Perhaps only tangentially related, but China’s main concern right now is its own back yard. They have been busy securing commodities around the world and recently have stopped sourcing much of their materials from Australia. Oz is a country that could potentially make it difficult for China, so China wants to strangle it.

  5. jim2 says:

    Chinese industry participants are diversifying their sources of bulk commodities in an attempt to cut reliance on Australian imports, in the wake of rising trade tensions ignited by the Morrison administration’s hostile policy toward China.

    https://www.globaltimes.cn/page/202105/1224330.shtml

  6. John Hultquist says:

    The magnitude of China’s “Ghost Cities” has been known for several years, 7 – 10 maybe.
    Longer in the making, Many photos on the web.
    April 2019: https://allthatsinteresting.com/chinese-ghost-cities
    Nov 2015: https://www.weforum.org/agenda/2015/11/where-are-chinas-ghost-cities

  7. jim2 says:

    The “Ghost Cities” also are allowing China to recycle iron and steel and such, further weakening demand for commodities elsewhere.

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