Evergrande Bank Collapse - Lehman's Moment?

[8ball]

Not sure why so many assume Evergrande is a bank. It's a real estate company.

Mostly phrasing, I guess. Lots of the news headlines sort of look similar to headlines from 2008.

 

[Rimbaud]

Mostly phrasing, I guess. Lots of the news headlines sort of look similar to headlines from 2008.

Actually it is both a real estate company and a bank.

 

[Pickman's model]

Actually it is both a real estate company and a bank.

Not for much longer I think

 

[Rimbaud]

Not sure why so many assume Evergrande is a bank. It's a real estate company.

It's not another Lehman moment. There isn't remotely the amount of contagion that existed when Lehman failed.

The Lehman comparison prompted me to revisit the Lehman thread on here that ran from August to September 2008, and it's startling to see the amount of false information flying around at the time - starting with the reports that 5,000 Lehman UK staff lost their jobs on the day the bank failed. There were in fact no redundancies at all that day.

Does anyone know if the poster who promised to stand naked in Broadgate for an entire Friday afternoon if Lehman failed made good on his/her promise?

There won't necessarily be the same scale of direct financial contagion, however the significance of it is that it likely marks the end of China's long period of rapid economic growth. The problem isn't just limited to Evergrande, there are other major property developers who could default and Evergrande's default isn't what caused it. The problem is the entire sector.

Large debt isn't necessarily a problem, the problem is if it is likely to be repaid or not. Chinese corporate debt is absolutely massive with the largest debt to GDP ratio in the world, double that of the US, and is also bad quality debt, unlikely to be repaid.

Evergrande is just the tip of China’s debt iceberg

China has one of the world's highest levels of corporate debt, making up 31% of the global total.

qz.com

Construction and real estate has been a major engine of growth so if that grinds to a halt, then crunch time might come for other heavily indebted sectors. A deep recession in China would have an absolutely massive global impact, and the political fallout could be incredibly dangerous as well.

It is a little hard to predict though, especially with data being rather opaque from China.

 

[8ball]

Chinese corporate debt is absolutely massive with the largest debt to GDP ratio in the world, double that of the US, and is also bad quality debt, unlikely to be repaid.

Who are these Chinese companies in debt to? I thought the US was massively in debt to China.

 

[yield]

Who are these Chinese companies in debt to? I thought the US was massively in debt to China.

Super Imperialism by Michael Hudson is good on this.
Super Imperialism: The Economic Strategy of American Empire | Michael Hudson | PDF

The larger America’s balance-of-payments deficit becomes, the more dollars end up in the hands of European, Asian and Near Eastern central banks, and the more money they must recycle back to the United States by buying U.S. Treasury bonds.

Over the past decade American savers have been net sellers of government bonds, putting their own money into the stock market, corporate bonds and real estate. Foreign governments have been obliged to hold U.S. bonds whose interest rates have fallen steadily, while their volume now exceeds America’s ability or willingness to pay.

Evergrande isn't an SOE, so it'll owe domestic and international bond holders.

 

[not-bono-ever]

Money manager disappears with $313m from Chinese builder

China Fortune Land Development says it has lost contact with a British Virgin Islands wealth manager.

www.bbc.co.uk

Lol

 

[stdP]

It's not another Lehman moment. There isn't remotely the amount of contagion that existed when Lehman failed.

Much like Rimbaud mentions above, no they're not Lehman's but they're symptomatic of a canker that many have suspected of existing in the chinese property market for a long time - I'm sure you remember the stories about whole towns being built with no-one living in them - and that Evergrande's one of the canaries in the coal mine.

As the aftermath of 2007 bit huge chunks out of investment opportunities in the west, lots of money went east after seeing huge returns from things like the property market, so there's lots of investment from the UK, US and EU riding on the chinese property market too. Again, probably to nowhere near the extent that the CDO market was in, but enough to be a cause for concern.

 

[Rimbaud]

This may be the thread for this.

Buyers of new homes in 50 Chinese cities go on mass mortgage strike

A rapidly increasing number of disgruntled Chinese homebuyers are refusing to pay mortgages for unfinished construction projects, exacerbating the country's real estate woes and stoking fears that the crisis will spread to the wider financial system.

m.independent.ie

Many unfinished construction projects left over by Evergrande and other real estate firms were actually purchased with a mortgage in advance of construction, so many Chinese are left paying a mortgage for a house which has not been built yet and may never be built. Unsurprisingly they are not happy about this and there are reports of "mortgage strikes" in 50 cities across China.

This raises a risk of contagion to the wider financial system as if everyone in that situation joined the mortgage strike the number of non-performing loans will increase by an additional $58 billion.

Homebuyers across China halt mortgage payments on unfinished projects, worsening fears of financial contagion - Hong Kong Free Press HKFP

Chinese homebuyers in dozens of cities have stopped making mortgage payments for unfinished projects, according to data from industry groups, worsening fears of financial contagion in the country’s troubled real estate sector. Authorities launched a crackdown on excessive debt in the property...

hongkongfp.com

This won't necessarily be a dramatic crash as they will probably use every tool available to avoid the value of the housing market being wiped out, but a long period of stagnation similar to what Japan faced seems inevitable.

https://www.washingtonpost.com/world/2022/07/14/china-gdp-economy-covid-lockdown/

The most recent quarterly growth rate was reported as 0.4% - if they are willing to admit such a low number then it seems more likely that the economy is actually in recession.

What this means is that China is not likely to overtake the US economy anytime soon - rather than catching up, the American economy is now outpacing and pulling ahead of China. Issues with demography means this is likely to become the norm.

There is a risk that Beijing may decide the window of opportunity for taking Taiwan is shrinking and they need to take action sooner rather than later. Xi's third term is the danger zone - if war can be averted for the next 5 years then that the window of opportunity where China could take Taiwan will close for the foreseeable future.

 

[Pickman's model]

There is a risk that Beijing may decide the window of opportunity for taking Taiwan is shrinking and they need to take action sooner rather than later. Xi's third term is the danger zone - if war can be averted for the next 5 years then that the window of opportunity where China could take Taiwan will close for the foreseeable future.

I have heard 2025 mentioned

 

[teqniq]

Not entirely sure about this... anyone?

 

[8ball]

Not entirely sure about this... anyone?

CNN are reporting it.

If I was to imagine a kind of “point where it all began” story, it might look a bit like this.

 

[8ball]

Just to add a teeny bit to that, their excuse is exactly the same one used in It’s A Wonderful Life.

So it’s probably all fine.