Tag Archives: Evergrande

Contagion! By James Rickards

In a massively over-indebted and interconnected world, financial collapse can spread like wildfire. The Chinese property sector may be the beginning of the conflagration. From James Rickard at dailyreckoning.com:

There has been a litany of bad news recently, including the U.S. August humiliation in Afghanistan, China’s aggressive actions against Taiwan and increased tensions with Iran, North Korea and Russia.

It will take the U.S. years, possibly decades, to recover from the debacle of August 2021 and the collapse of American prestige. All of these geopolitical events combine to undermine confidence in U.S. power.

When that happens, a loss of confidence in the U.S. dollar is not far behind.

And, perhaps most importantly of all recent bad news, is a market meltdown and slowing growth in China.

Greatest Ponzi Ever

I’ve long advised my readers that the Chinese wealth management product (WMP) system is the greatest Ponzi in the history of the world. Retail investors are led to believe that WMPs are like bank deposits and are backed by the bank that sells them. They’re not.

They’re actually unsecured units in blind pools that can be invested in anything the pool manager wants.

Most WMP funds have been invested in the real estate sector. This has led to asset bubbles in real estate (at best) and wasted developments that cannot cover their costs (at worst). When investors wanted their money back, the sponsor would simply sell more WMPs and use the money to pay back the redeeming investors.

That’s what gave the product its Ponzi characteristic.

The total amount invested in WMPs is now in the trillions of dollars used to finance thousands of projects sponsored by hundreds of major developers. Chinese investors are all-in with WMPs.

Now the entire edifice is collapsing as I predicted it would.

The largest property developer in China, Evergrande, is quickly headed for bankruptcy. That’s a multibillion-dollar fiasco on its own. Evergrande losses will arise in WMPs, corporate debt, unpaid contractor bills, equity markets and unfinished housing projects.

China’s entire property and financial system is on the verge of a world-historic crack-up. And it won’t remain limited to China.

It comes back to contagion.

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“Catastrophic” Property Sales Mean China’s Worst Case Scenario Is Now In Play, by Tyler Durden

The financial situation of a number of Chinese property developers is dire, but the most serious issue is the state of the Chinese property market. Property is a huge part of Chinese people’s assets, and weakness there will translate directly into economic weakness and perhaps a recession. From Tyler Durden at zerohedge.com:

o matter how the Evergrande drama plays out – whether it culminates with an uncontrolled, chaotic default and/or distressed asset sale liquidation, a controlled restructuring where bondholders get some compensation, or with Beijing blinking and bailing out the core pillar of China’s housing market – remember that Evergrande is just a symptom of the trends that have whipsawed China’s property market in the past year, which has seen significant contraction as a result of Beijing policies seeking to tighten financial conditions as part of Xi’s new “common prosperity” drive which among other things, seeks to make housing much more affordable to everyone, not just the richest.

As such, any contagion from the ongoing turmoil sweeping China’s heavily indebted property sector will impact not the banks, which are all state-owned entities and whose exposure to insolvent developers can easily be patched up by the state, but the property sector itself, which as Goldman recently calculated is worth $62 trillion making it the world’s largest asset class, contributes a mind-boggling 29% of Chinese GDP (compared to 6.2% in the US) and represents 62% of household wealth.

It’s also why we said that for Beijing the focus is not so much about Evegrande, but about preserving confidence in the property sector.

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Default Of Second Chinese Developer Sparks China Junk Bond Meltdown As Contagion Explodes, by Tyler Durden

This is how debt implosions get rolling. From Tyler Durden at zerohedge.com:

As we expected, Evergrande is only the first cockroach.

With the world waiting to find out the fate of a $260 million bond issued by Jumbo Fortune Enterprises which is guaranteed by Evergrande, and which has no grace period so an event of default could take place as soon as this week (the bond has five business days to make payment subject to administrative and technical error), overnight, stocks and bonds of China’s heavily leveraged property tumbled after a failure by smaller developer Fantasia Holdings Group to repay notes deepened investor concerns about the sector’s outlook.The non-payment forced S&P to downgrade Fantasia (1777.HK) to selective default earlier this morning.

As Bloomberg points out, “Chinese junk dollar bonds were poised for their biggest selloff in at least eight years amid renewed concern that authorities will do little to alleviate the credit crisis gripping the industry.” Yields are near a decade high, and with Evergrande stock still halted, investors took out their wrath on peer developers who still trade and whose shares tumbled, with Sunac China Holdings and China Aoyuan Group falling at least 10%. Meanwhile, as noted on Sunday, Evergrande’s silence on a reported stake sale in a unit left its shares suspended.

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“The Endgame Of Communist Rule Has Begun”: Evergrande’s Fall Shows How Xi Has Created A China Crisis, by Niall Ferguson

Is Evergrande illustrating the shaky foundations of a society and economy built on debt and repression? From Niall Ferguson at Bloomberg via zerohedge.com:

The developer’s collapse isn’t leading to global contagion, but China’s looming economic disaster might…

A major mistake of the Cold War was the tendency of Western observers to overestimate the Soviet Union. I have often wondered if the same mistake is being repeated with the People’s Republic of China. Then again, for every article over the last 10 years that predicted China’s economy would overtake that of the U.S., there were at least two prophesying a “China crisis.”

“The endgame of Chinese communist rule has now begun,” wrote David Shambaugh in 2015.

Wisely, he added: “Its demise is likely to be protracted.”

That same year, Jim Chanos of Kynikos Associates warned, “We’re getting inexorably to a tipping point in China.”

Last week began with yet another China tipping point. The impending collapse of the giant property developer China Evergrande Group, we were warned, could be China’s “Lehman Moment.” For 24 hours, global stock markets retreated by a couple of percentage points. By Tuesday morning, however, the story appeared to be over. The jitters subsided and investors got back to parsing the utterances of U.S. Federal Reserve Chair Jay Powell to make sure that nothing he said was surprising.

So if the China crisis never happens — no matter how many times China permabears like Chanos predict it — does China eventually overtake the U.S.? Thus far, it has done so only in terms of gross domestic product adjusted on the basis of “purchasing power parity,” which allows for the fact that a meal in Chongqing is quite a bit cheaper than one in Chicago. On a current dollar basis, China’s GDP last year was still just 72% of U.S. GDP, even with Hong Kong included.

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What’s Really Going On In China, by Charles Hugh Smith

Is China trying to stop the easy credit shenanigans and fun and games that characterize the US financial system? From Charles Hugh Smith at oftwominds.com:

Losses will be taken and sacrifices enforced on those who don’t understand the Chinese state will no longer absorb the losses of speculative excess.

Let’s start by stipulating that no one outside President Xi’s inner circle really knows what’s going on in China, and so my comments here are systemic observations, not claims of insider knowledge.

Many western observers have noted the centrality of Marxist-Leninist-Maoist doctrine in President Xi’s writings. This is somewhat akin to invoking America’s Founding Fathers to support one’s current policies: if you’re trying to modify state policy in China, you have to explain it in the context of the Chinese Communist Party’s history and doctrines. Never mind if the ideals were not met; what’s important is establishing continuity and resonance with the history of China, the core doctrines of Chinese Communism and the CCP’s leadership based on those doctrines.

That said, we should be careful not to read too much into doctrinal evocations such as common prosperity, which are useful conceptual anchors and slogans but not the full story.

What’s actually happening in China isn’t Marxist or Capitalist–it’s plain old non-ideological human greed, hubris and magical thinking manifesting as moral hazard running amok.. Moral hazard— the separation of risk and consequence, as speculators make increasingly risky bets because they know any losses will be covered by the state–is effectively the new State Religion in China: everyone is absolutely confident that every punter, especially all the rich, powerful, well-connected speculators–will be bailed out by the central government.

Greed knows no bounds when a speculator is insulated from risk, for people have an insatiable appetite for risky bets when the gains will be theirs to keep but any losses will be covered by the government.

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A Gentle Reminder: Lehman Was Not ‘A Moment’, by Peter Tchir

The world financial system was going to crash in 2008 with or without Lehman. From Peter Tchir at Academy Securities via zerohedge.com:

Everyone seems to be talking about the Lehman Moment again this week.

While there is a debate around whether Evergrande is a Lehman Moment or not, that misses the crux of the problem, Lehman never was a “moment” at least by any standard definition of “moment”. The Lehman bankruptcy was an important event, maybe even a seminal event during the Great Financial Crisis, but it was not a “moment”. I cannot tell why, of all the important events that occurred during the Financial Crisis, and leading up to it, the nation has embraced this concept of the Lehman Moment? Maybe because it has the beauty of pinning the blame on a now non-existent Wall Street firm? It is always nice to have a scapegoat, a single moment in time or person that you can blame, especially when that person or entity isn’t well regarded. Lehman seems to fit the bill well. Much better than blaming it on individuals taking out NINJA loans (the No Income No Job Application loans were one of my favorite terms of the crisis). Maybe we don’t want to blame any other number of actors that failed before or after Lehman for their mistakes, because they hit too close to home (i.e., maybe we as a nation would have to shoulder more blame). Maybe too many of the surviving actors don’t want to be associated with their part of the crisis, so they too like to pin it on Lehman. It is probably too difficult to go back in time and argue that some policies from D.C. may have contributed to the problem (worth thinking about in an era where D.C. seems to “know” better than we do, what we need). There are a lot of reasons why the Lehman Moment has caught on, I just don’t think it is accurate. I have not seen one single report explaining why Lehman going bankrupt or not would have affected the price of homes in Las Vegas.

I believe, that had Lehman been “saved” the problems we faced would still have been result, we just would have taken a more circuitous route. That an inexorable chain of events had been started before Lehman and would have continued regardless of saving Lehman or not.

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It’s Easier to “Print” Money to Make Refrigerators, by Bill Bonner

Who needs refrigerator manufacturers and other real businesses when you’ve got a central bank? From Bill Bonner at rogueeconomics.com:

What we are wondering today is what’s ahead for the U.S. economy – inflation or deflation? Maybe the Evergrande story will give us a clue.

To fully understand the Evergrande story, you almost have to understand the whole story…

…of how, in 1971, the U.S. switched to a “flexible” dollar that it could print at will…

…and how the switch created a boom in China… and a bust in U.S. manufacturing (it’s easier to “print” money than to make refrigerators).

In an honest economy, pre-1971, the U.S. had to repatriate its dollars by offering equivalent quantities of goods and services to the Chinese…

…or risk having to settle up in gold.

Concrete River

But with the new system… it could just print up more dollars… which the Chinese, bless their hearts, used to buy U.S. bonds…

All this money created a boom in China… which quickly got out its cement trucks. The concrete flowed like the Yangtze.

We saw the construction boom on our trip to China in 2014 – a breathtaking display of human industry and material progress.

The highways were new. The buildings were new. The trains… docks… factories – all new. You could scarcely find a house more than 18 months old.

Never in the history of the world had so many people gone from being so poor to so rich in so short a time. Per capita income rose from $318 in 1990 to $10,500 in 2020.

And never in history had so much money been borrowed to make it happen. From $1.7 trillion of total debt in 2000, China now owes nearly $50 trillion. Its debt-to-GDP ratio now stands at 335%.

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China’s Crackdown on Debt, Tech & Evergrande Sends Frazzled Wall Street Titans to China, by Wolf Richter

The Chinese government increasing intervention in the Chinese economy has a lot of Wall-Streeters upset. From Wolf Richter at wolfstreet.com:

The property sector and its debts are possibly the biggest financial mess in China’s history.

By Wolf Richter. This is the transcript of my podcast of last Sunday, THE WOLF STREET REPORT.

The crackdowns by Chinese authorities on some of the biggest hype-and-hoopla industries have sent investors heading for the exits. There is a crackdown on debt to keep the financial system from imploding. There’s a crackdown on property speculation to tamp down on housing prices and on debt. There’s a crackdown on big tech – mostly internet, social media, and online gaming companies – for their monopolistic size and practices and a slew of other issues.

There’s a crackdown on education tech companies that sell off-campus educational courses that have driven the costs of education into the sky, discouraging Chinese couples from having more than one child. There’s a crackdown on all kinds of other activities that include reporting financial news and analysis in a way that the government doesn’t approve.

There are all kinds of reasons for these crackdowns, including the push by President Xi to create “common prosperity,” which has become a mantra to fight the ballooning wealth disparity linked to the surge in asset prices, including home prices that are now making homes unaffordable for the masses.

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Is Evergrande A Symptom Of Deeper Malaise? by Bill Blain

How much of the Chinese miracle was courtesy of a credit card? From Bill Blain at morningporridge.com:

Evergrande’s imminent default is rocking markets – but few believe the collapse of a Chinese property developer could trigger a global financial crisis. What if Evergrande is just a symptom of a deeper malaise within the Chinese economy and its political/business structures? Maybe there is more at stake than we realise? What if Emperor Xi decides he needs a distraction?

“If that’s true, we are very close to the China Syndrome ”

This Morning – Evergrande’s imminent default is rocking markets – but few believe the collapse of a Chinese property developer could trigger a global financial crisis. What if Evergrande is just a symptom of a deeper malaise within the Chinese economy and its political/business structures? Maybe there is more at stake than we realise? What if Emperor Xi decides he needs a distraction?

After yesterday’s market tumble Evergrande dominates thinking this morning. The early headlines say the risk is “easing”. Don’t be fooled. S&P are on the wires saying it’s on the brink of default and is unlikely to get govt support. It’s Asia’s largest junk-bond issuer. Anyone for the last few choc-ices then?

The market view on the coming Evergrande “event” is mixed. Some analysts are dismissing it as an internal “China event”, others reckon there may be some systemic risk but one Government can easily address. There is some speculation about “lessons” to be learnt… There are even China supporters who reckon its proof of robust China capitalism – the right to fail is a positive!

I’ve got a darker perspective.

The massive shifts we’ve seen in China’s political/business public persona over the past few years have been variously ascribed: a reaction to Trump’s protectionism, China taking its place as a leading nation, Xi flexing his military muscle, and now a clampdown on divisive wealthy businesses to promote common prosperity.

What if Evergrande is just a symptom of something much deeper? That that last 30-years of runaway Chinese growth has resulted in a deepening internal crisis, one that we barely perceive in the west? What if the excesses that have spawned Evergrande and the illusion every Chinese can afford luxury flats and a western standard of living is about to implode? Crashing oriental minor chords!

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From the Notebook: Evergrande and How About that Dollar Bear Market . . . by Tom Luongo

It appears that Xi Jingping is well aware of American and British color revolution and regime change efforts and is determined to avoid that in China. From Tom Luongo at tomluongo.me:

From the Notebook posts are reworks of articles originally published for my Patrons. This one was first published on September 7th.

While it’s becoming easier to see how the various projects supporting the Great Reset are progressing just by reading the headlines and seeing how things are spun to manufacture consent, sometimes a story is deeper than the headlines.

I’ve watched the situation surrounding Evergrande’s collapse in China unfold like everyone else in this space.  Like many of you, and hat tip to Zerohedge for being on this from the beginning, I could tease out some of the story just by following the progression of the headlines, especially in light of China’s big changes in attitude towards foreign capital.

Over the past 2 years China has cracked down on a number of sectors within its economy. It started with the moves on Hong Kong and the extradition law which sparked huge protests in the summer of 2019. It evolved into the curious disappearance from public life for months of Alibaba CEO Jack Ma. This summer we saw China uproot the cryptocurrency market by kicking out all of the bitcoin miners over a weekend, they’ve doubled down on this policy again recently.

In September 2019 I wrote that I thought China’s moves on Hong Kong were pre-emptive moves to undermine British influence there through the banking system. Because, the protests in Hong Kong last year looked an awful lot like Portland’s and Minsk’s and Kiev’s (2014) etc. etc.

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