Evergrande
This is looking more and more likely to turn into a banking crisis rather than just a real estate issue (much like in 2008). I think Evergrande is part of something much bigger.
there seems to be little to no securitisation etc. that blows the debt out of proportion. When a developer defaults, banks feel less keen to lend, making other developers more likely to fail. And the cycle goes on. Also, it's not helped by China's policies outlined in this Carnegie article. ( What Does Evergrande Meltdown Mean for China? - Carnegie Endowment for International Peace)
However, I do think that banks have been concealing losses and it is taking some time for those losses to be realised. The money has been spent on developing sites etc. and that can't be undone. The banks were the people financing Evergrande. If anything, there is a high chance that they were carrying more risk than Evergrande themselves.
Panic (Contagion) has already begun to spread and that in itself can make the situation worse. The real question is how much exposure these Chinese banks have to the property market- some people suggest over 40% for the higher risk banks (Rural Banks). This is likely to be a chain reaction - Evergrande was not the first, it had the most attention and was one of the largest. If anything, this seems to be the "calm" before the storm...Evergrande and the parties financing their projects (HINT) "over" leveraged on real estate.This resulted in very high debts which they kept rolling over. In Evergrande's case they produced corporate bonds which investors could buy.
However, they could not pay the interest payments on the due date.
In the end, when the value of the properties was less than what they paid originally.
In Evergrande's case, it was the culture of China to grow economically. This was China's "masterplan". It was a decade of policy that underpinned China's growth - debt expansion, largely focused on property, that achieve high growth, but do not create productive assets. They both stimulated consumer demand not just nationally, but globally. However, the quality of goods both nationally and internationally was never there. The quality of goods was never checked. It was only growth that mattered- one of the problems of GDP growth.
Interest rates are SUPER low right now because we still haven't recovered fully from the GFC and also a virus called Covid happened. It was never this low in the years running up to the GFC.
US are in trouble for too many reasons – Afghanistan, inflation, federal reserve trading scandals, supply chain problems. To add another to the list, in the USA, it should be general knowledge that China export A LOT (roughly 18%) which kept US inflation in check. AD= C+I+G+ (X-M). (High M for the US reduces AD keeping the price level (inflation) controlled.) Without these imports, the US PL shoots upwards. As a result, inflation will worsen in the US.
In both cases, it is likely the stock market will crash. Speculation has been like that of the DotCom bubble especially in crypto, meme stocks, electric vehicle companies and subscription-based companies. Prior to this, there have been low interest and increasing inflation since the GFC- the crash has already been written. Investor confidence is likely to decrease. The main question will be, if Evergrande is close to bankruptcy then it could happen to anyone (HSBC. for example, have close connections to China). The effect will be global; more so, since, in recent years China's power and influence has increased.
In Evergrande's case: local governments raise revenue by land sales to support infrastructure projects. Developers (Evergrande) take on debt to buy the land and build housing. Citizens take savings and debt to buy the houses. This can and has continued until debt runs dry. China now have cracked down on debt with warnings and increasing mortgage rates- a bit like the adjustable-rate mortgage, except this time it was enforced by the CCP. This shuts off the debt flow. A bank gives someone money, so they can create or buy something of value, which allows the loan to be repaid.
If that money does not create value, the bank will lose money. The scale is bigger, in my opinion. There are many unfinished housing projects- these don't have value. If you were a bank to a property developer you would only care about
saving yourself now- they don't want any more losses. This could, literally, make the whole situation 10 times worse as now it is a certainty that the property developers fail. Another fact-Real estate is 25% of China's GDP. The other problem was with sky-rocketing house prices, for those who bought, relative debt (overall) was increasing. As a result, household debt increased. Will the citizens be protected? I wouldn’t- personally companies and people who take on to much risk should be punished. However, it wouldn’t be in the CCP’s interests to allow that to happen- they would murder the most powerful economy in the world. What do they do though? They have already spoken about their distaste to get involved.
Also, China is looking at a winter of power shortages that’s going to challenge its output further. These power shortages have now started and are global. These have stopped production in factories. People claiming that renewable energy is now a must are wrong- oil and gas will prevail. There is still one trade cycle in oil and gas.
Briefly again:
“The Congressional Budget Office projects that, if the debt limit remains unchanged, the Treasury’s ability to borrow using extraordinary measures will be exhausted, and it will most likely run out of cash near the end of October or the beginning of November, consistent with CBO’s prior estimate. If that occurred, the government would be unable to pay its obligations fully, and it would delay making payments for some activities, default on its debt obligations, or both. The timing and amount of revenue collections and outlays over the next few weeks are especially uncertain, given the magnitude of outlays related to the 2020–2021 coronavirus pandemic and for disaster relief, and could differ from CBO’s projections. Therefore, the extraordinary measures could be exhausted and the Treasury could run out of cash earlier or later than CBO projects.”
Either way, the US are struggling here as well. Inflation or default? Which one is it? Read about sovereign default on Wikipedia- it is highly interesting and could be of use. |
