Evergrande

[Pogue Mahone]

Haven’t seen a thread about this but seems like a bit of a serious worry right now? Someone reassure me please. A 2008 style financial crisis on top of covid just seems unfair.

 

[adexkola]

Ah great, something to shock the housing market back to normal

 

[VorZakone]

Wonder if the CCP will let them fail or intervene. Probably the latter.

 

[Pogue Mahone]

Wonder if the CCP will let them fail or intervene. Probably the latter.

Apparently they won’t intervene for fear of devaluing their currency.

 

[Samid]

I blame Tether @Murder on Zidane's Floor

 

[Cheimoon]

Apparently they won’t intervene for fear of devaluing their currency.

Also because Evergrande's current situation is the result of the government's crackdown on what they consider unbridled capitalism. I can't remember the exact background now, but Evergrande were fine with the way they continuously reinvested their debts, until very recently. So now the government is stuck between a rock and a hard place: help Evergrande and seem weak on their resolve, or let them fall apart and risk a serious financial crisis (Chinese housing market plus wider repercussions). A more likely scenario might be a forced split-up of the company, with healthy parts being bought up to protect the economy and the rest left to rot.

 

[mav_9me]

The one unique thing here is CCP can do anything they want. Their options include anything and everything.

 

[bleedred]

Also because Evergrande's current situation is the result of the government's crackdown on what they consider unbridled capitalism. I can't remember the exact background now, but Evergrande were fine with the way they continuously reinvested their debts, until very recently. So now the government is stuck between a rock and a hard place: help Evergrande and seem weak on their resolve, or let them fall apart and risk a serious financial crisis (Chinese housing market plus wider repercussions). A more likely scenario might be a forced split-up of the company, with healthy parts being bought up to protect the economy and the rest left to rot.

How much exposure does the US and European banks have?. I cannot seem to find much info on that other than the supposed leaked document.

 

[Cheimoon]

How much exposure does the US and European banks have?. I cannot seem to find much info on that other than the supposed leaked document.

I have no idea. I'm basing this off an article in a Dutch newspaper last week, which focused on the topics I referenced without attention to international repercussions.

 

[The Boy]

I have no idea. I'm basing this off an article in a Dutch newspaper last week, which focused on the topics I referenced without attention to international repercussions.

There will be foreign exposure to Evergrande, but I also have noidea how much. More important is the fact that Evergrande owes money to around 170 banks and 120 other financial firms, so if Evergrande defaults, which is looking likely, it could quickly lead to a credit crunch in China and there will be a huge amount of foreign exposure to that.

 

[Carolina Red]

Oh good. Another financial collapse…

 

[Cheimoon]

I looked up that article again. Some things I thought might be interesting.

Evergrande is a real estate company that has spread all across the economy, in sectors including football clubs, mineral water, electric cars, health care, attraction parks, and so on. The company has never really cared about its cash flow, as it always found ways to refinance its debt, through new debts and by selling its real estate before construction had finished. Its problem is that the Chinese government has tightened regulations around debts, and now it can't do those things anymore. It therefore has to find a different way to deal with its debt of around €250B, which exceeds the total market value of e.g. Coca-Cola. But there is none. The company has tried selling off several of its departments, but that's not going well - and so it is spiraling towards bankruptcy.

Given the size of the company, that's no joke. As an immediate effect, there are some 1.4M homes in China that may not be completed if all of Evergrande's activities come to a standstill - that represents about €170B in value. This may in turn cause a crash in the Chinese housing market and huge problems for municipalities. Beyond that, as @The Boy mentioned above, there is a large number of banks and financial firms that would like to get their money back. If Evergrande is going to default on all those debts, then the reverberations will spread far and wide through the international financial sector. I have not seen the potential size of that quantified anywhere, but stock exchanges across the world have been going down today in fearful anticipation of what may be about to happen.

As I said, Evergrande is going down now because of regulatory changes, which are intended to reduce market speculation and reign in the Chinese housing market. The government hence won't give in - but also can't ignore the problem completely, because the risk to the Chinese economy (apparently, 25% of the Chinese economy depends on real estate) and Chinese employment (3.8M jobs are at risk) is too big. Given China's emphasis on stability, it seems likely that the state will take over to take apart the company, so it will fall (and partly survive) into pieces instead of crashing down hard as a whole on the Chinese (and global) economy.

 

[berbatrick]

I remember seeing massive empty unfinished blocks of buildings in almost-empty areas outside cities in China, about 15 years ago. Often it was because the developer ran out of cash. Amazing that they let such a visibly obvious problem go so far. But then I'd go back a year later, and that same area, if not the buildings themselves, would be full of people. So maybe the expectation was that they could keep building even if a few projects don't work out.

 

[The Boy]

The big worry is that it it not just Evergrande, according to the Financial Times, it seems likely that other Chinese developers are highly leveraged and could default as well.

“Evergrande is just the tip of the iceberg,” said Louis Tse, managing director at Wealthy Securities, a Hong Kong-based brokerage. Chinese developers were under substantial repayment pressure on dollar-denominated bonds, he added, while financial markets had grown nervous that Beijing would push listed real estate groups to cut the costs of housing in mainland China and Hong Kong. “That affects the banks as well — if you have lower property prices what happens to their mortgages?” Tse said. “It has a chain effect.”

Full article here: https://www.ft.com/content/952923b7-f421-407e-b14a-ad2ff190a134

It's already having quite a large international impact, metal prices for instance have fallen dramatically over fears of reduced demand from the Chinese property market, that in turn has driven down mining stock in both the US and UK.

As for whether the Chinese government will step in, I agree with @Cheimoon, they will have to step in to support part of the company. At the moment 1.6 million apartments have been bought by the public but are not built yet, also Evergrande earlier this year started borrowing cash from tens of thousands of employees, who in turn borrowed from friends and family. It was packaged as high interest investments, Evergrande stopped repaying those loan this month.

Around 70 to 80 percent of Evergrande employees across China were asked to put up money that would then be used to help fund Evergrande operations, Liu Yunting, a consultant for Evergrande Wealth, recently told Anhui Online Broadcasting Corporation, a state-owned news group.


The extent of the campaign and how much money it might have raised were unclear. Employees were told to each invest a certain amount of money in Evergrande Wealth products, and that if they failed to do so, their performance pay and bonuses would be docked, employees told Anhui.

Company management said the investments were part of “supply chain financing” and would allow Evergrande to make payments to its suppliers, Mr. Liu said in his interview with Anhui. “Because we employees had to complete a quota, we asked our friends and families to put money in,” he said.

Mr. Liu said his parents and in-laws had invested $200,000, and that he had put about $75,000 of his own money into Evergrande Wealth.

Full NYT article here: https://www.nytimes.com/2021/09/19/business/china-evergrande-debt-protests.html

 

[The Boy]

I remember seeing massive empty unfinished blocks of buildings in almost-empty areas outside cities in China, about 15 years ago. Often it was because the developer ran out of cash. Amazing that they let such a visibly obvious problem go so far. But then I'd go back a year later, and that same area, if not the buildings themselves, would be full of people. So maybe the expectation was that they could keep building even if a few projects don't work out.

We travelled from Cheng Du to Beijing by train in November 2019 and were struck by the amount of empty cities we travelled through. Literally thousands of empty apartment blocks, offices, streets etc all 5G ready and just empty as though they were waiting for millions of people to move in in one go.

 

[prateik]

The Ghost cities have been something I have been reading about for 10-15 years now.. Considering their population isnt growing, there can only be so much demand.. it mustve been unsustainable.

 

[Pexbo]

With the author of the OP and the name of the thread I assumed this was going to be an Irish thing.

 

[VorZakone]

Why did it go so wrong in the first place? I would have expected the CCP to intervene much faster before the problem got so big.

 

[The Boy]

Why did it go so wrong in the first place? I would have expected the CCP to intervene much faster before the problem got so big.

They tried to and that's part of what sparked the problem. They changed the rules to try and limit the exposure of Chinese banks to the property bubble. But by placing restrictions on what could be loaned to these companies, they inadvertantly caused a liquidity crisis within the companies themselves, I guess they didn't realise or want to realise how much these companies were reliant on loans and reservicing their debt.

 

[17Larsson]

The most important question in all this is do I continue with buying my house this month

 

[OleBoiii]

The most important question in all this is do I continue with buying my house this month

#Pray4Larson #EverGrande #MoreLikeNeverGrande

 

[Maagge]

The most important question in all this is do I continue with buying my house this month

Without being an expert I don't think it's risky owning a house/apartment as long as you're not forced to sell through e.g. a change in employment situation.
If the market crashes and you're not forced to sell at a loss because you can no longer afford the loan then you shouldn't have to worry. The issue is mostly for people who bought at the very top end of what they could afford and now suddenly find themselves out of work. Same goes for people who've postponed repayment for the first, say, 10 years.

Of course it's difficult to know whether your particular employment situation is stable if the market crashes.

 

[Wednesday at Stoke]

The most important question in all this is do I continue with buying my house this month

Just my opinion, but you shouldn't really worry about property losing value if you're in a Western European country that isn't bleeding population. There is only a finite land mass and if anything the rising sea levels in the next 50 years is going to further shrink that. Land and property should hold value in the longer run, provided you are buying to live and not planning to rent it out as passive income or speculating short term.

 

[MikeUpNorth]

https://www.ft.com/content/0b03d4de-1662-4d30-bcfd-c9bae24fa9cc

Smells like one big Ponzi scheme to me.

 

[Simbo]

I've not read up on this at all but predictions of a financial crisis and "omg China" rolled together are a clickbaiters wet dream so I've concluded its absolutely nothing to worry about.

 

[Murder on Zidane's Floor]

I blame Tether @Murder on Zidane's Floor

Apparently, a lot of the rumours linking Evergrande and Tether together are rather spurious. I am sure there is some cross over because birds of a feather right? But doubt the link is that close.

 

[Murder on Zidane's Floor]

I blame Tether @Murder on Zidane's Floor

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[mariachi-19]

I remember seeing massive empty unfinished blocks of buildings in almost-empty areas outside cities in China, about 15 years ago. Often it was because the developer ran out of cash. Amazing that they let such a visibly obvious problem go so far. But then I'd go back a year later, and that same area, if not the buildings themselves, would be full of people. So maybe the expectation was that they could keep building even if a few projects don't work out.

A lot of these companies banked on the increase in transport creating additional city hubs in the rural areas. You see alot of these if you travel in China because they are often on the main train lines. A quick google of chinese ghost cities will bring them up. There is one even modeled after paris!

So you'll be on a bullet train, look out and see three massive sky scrappers in rice fields. It made zero sense but they were trying to beat the rush in hope that these areas would explode and it hasn't worked.

 

[Pogue Mahone]

A lot of these companies banked on the increase in transport creating additional city hubs in the rural areas. You see alot of these if you travel in China because they are often on the main train lines. A quick google of chinese ghost cities will bring them up. There is one even modeled after paris!

So you'll be on a bullet train, look out and see three massive sky scrappers in rice fields. It made zero sense but they were trying to beat the rush in hope that these areas would explode and it hasn't worked.

Don’t they even have a bunch of ghost airports?

 

[Dr. Dwayne]

The most important question in all this is do I continue with buying my house this month

If this causes a problem for your lender you may find it more difficult to get a mortgage later. Proceed.

 

[Cheimoon]

They tried to and that's part of what sparked the problem. They changed the rules to try and limit the exposure of Chinese banks to the property bubble. But by placing restrictions on what could be loaned to these companies, they inadvertantly caused a liquidity crisis within the companies themselves, I guess they didn't realise or want to realise how much these companies were reliant on loans and reservicing their debt.

I'm not sure it's by accident. The Chinese government has been going in hard on lots of things in the course of the past year; it seems they decided that society is both malleable and not where it should be, and now is the time to make change happen. That has made lots of victims already and this is just another round of that - except that it's a much bigger round, and you may be right that they underestimated the full extent of what they were addressing here.

The Ghost cities have been something I have been reading about for 10-15 years now.. Considering their population isnt growing, there can only be so much demand.. it mustve been unsustainable.

I guess it's based on the mass migration of Chinese workers from the countryside to the city? As you say, it certainly isn't based on population growth; the Chinese population is currently expected to shrink by a few hundred million over the coming decades (except if new demographic measures will work or if there is mass immigration).

 

[Dans]

I'm not sure it's by accident. The Chinese government has been going in hard on lots of things in the course of the past year; it seems they decided that society is both malleable and not where it should be, and now is the time to make change happen. That has made lots of victims already and this is just another round of that - except that it's a much bigger round, and you may be right that they underestimated the full extent of what they were addressing here.

I guess it's based on the mass migration of Chinese workers from the countryside to the city? As you say, it certainly isn't based on population growth; the Chinese population is currently expected to shrink by a few hundred million over the coming decades (except if new demographic measures will work or if there is mass immigration).

Didn't they stop the one child policy fairly recently?

 

[berbatrick]

Didn't they stop the one child policy fairly recently?

Yes.
I read that they now have the same problems in this as the US and some other advanced countries - cost of childcare/disruption from the job makes having children difficult, so just legalising multiple children hasn't changed things too much, they would need to subsidise it somehow.

 

[Cheimoon]

Didn't they stop the one child policy fairly recently?

Yes.
I read that they now have the same problems in this as the US and some other advanced countries - cost of childcare/disruption from the job makes having children difficult, so just legalising multiple children hasn't changed things too much, they would need to subsidise it somehow.

Exactly. I think it has actually been permissible to have two kids for a while already, and now it's three (if I'm not mistaken); but there were anyway many loopholes in the one-child policy already. As @berbatrick says, the problem is the cost of children - which is even worse in China because society is extremely competitive and buying (expensive) extra classes for your kids is hence very common. The government is trying to deal with that as well actually (school should be enough, that sort of thing), but a lot needs to change for the cost of living to drop enough and mindsets to change enough (after all, birth rates are dropping or already low across the world) for all these measures to have a significant impact.