
China defaults hit record in 2018, and the 2019 pace is triple that - adventured
https://www.bloomberg.com/news/articles/2019-05-07/china-defaults-hit-record-in-2018-the-2019-pace-is-triple-that
======
PakG1
So I'm doing an MBA right now. Yeah, I know, I know. Anyway, it's a world-
ranked program, located in Hong Kong. I will say that I actually have learned
a lot, if that makes the below easier to believe.

One of my classmates is a senior finance manager or something for a Chinese
real estate company. Just finished a macro economics class where the professor
identified various issues and risks around the world and particularly
identified corporate debt and real estate prices (among other things) as being
a really big risk in China. He also happens to get invited to advise the top
of the top levels of the Chinese government on their economic planning, so he
very much has a horse in this race.

So my real estate finance manager classmate objected to real estate prices
being a risk. She told the professor in front of the class that if things ever
get bad, the Chinese government will step in and take care of everyone. This
prof advises the government about their economic risks and she's telling him
there's no risk.

I have no idea what to think anymore. The world is crazy.

~~~
daemin
Conspiracy idea: The Chinese government wants everyone to default on loans
because then they'll get to claim ownership of all the assets. So everything
will become state owned once again, communist dream?

~~~
em-bee
ownership in china is time limited anyways, i think to 75 years. at that point
properties go back to the government no matter what. so this wouldn't make
much difference

~~~
vkou
What's the difference between owning a 75 year lease on a property, and owning
a property, where every year, you have to pay a ~1.33% property tax on the
value of said property?

It's not like China is the first country in the world that has fixed-year
leases on housing. I know for a fact that you can find such properties in both
Canada, and the United Kingdom.

~~~
em-bee
the main concern i'd have is that they are looked as being the same without
people being aware that there is a difference.

people are saying stuff like: buying an apartment in the US or in singapore is
better than buying one in china, not realizing that they are effectively
different models. calling it "ownership of a longterm lease" is a very good
name that much better describes the reality. (it's the first time i see that
term, but it just makes sense)

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MR4D
China's goal is to eliminate social upheaval, mostly centered on the concept
of full employment. Without it, the country risks social upheaval.

Their second goal is a growing economy, so that the people can be richer, on
the thinking that richer people have more to lose, and less like to cause
social upheaval.

The end result of this is that China will continue to contort itself to
satisfy its goal. Just like the Thanksgiving Turkey, this works great...right
up until it doesn't.

What I hope HN people are doing in the background is contemplating what
happens on that Day of Reckoning, and how it impacts them and their lives.

If that day happened tomorrow, commodity prices would drop across the board.
Oil would drop, as would gas, coal, grains, livestock. That would be great
(unless you are employed in those industries).

Then, real estate prices will drop, as the Chinese trying to get money out of
the country won't be able to (it likely will be devalued, and possibly near
worthless). Vancouver, and Canadian real estate in general will have price
collapses. This will cause Canadian bank failures, and dry up credit in
Canada.

Meanwhile, companies with significant exposure in China will see their stock
drop. Cash flow will be reduced, and for some, significantly. Assets may have
to be marked-down to lower book values.

Further, the companies that depend on the aforementioned firms will endure
hardships of product logistics - manufacturing, inventory, and quality control
will all go a little haywire.

Firms that can move their supply chains out of China quickly will do so,
helping various other countries.

But countries that have significant percentages of their GDP devoted to raw
materials production (such as Africa, the Arabian peninsula, Russia, and
Australia) will go into recession, and some into depression.

That will result in a drying up of global capital (probably quickly, as
bankers run faster than most when they hear canaries chirp), and global
shipping.

I could go on, but you get the idea. So much of our lives (wherever we live)
depend on supply chains that either run through China, or are significantly
affected by China (like concrete and steel), that we are all going to be
effected, and economically speaking, it won't be pretty for the world.

~~~
yeahitslikethat
What's the time line on this getting started?

What's the best strategy for investing? Asset allocation?

To be specific

Near term: < 6 months Short term: 6 Mos - 2 yrs Midterm: 2 years - 5 yrs Long
term: 5 years or more

what you're predicting here is in line with mine, but yours is way more well
thought out ... and globally catastrophic.

Where can money be spent right now as an investment?

~~~
gscott
This may never happen

1\. China is converting as much of there funny money Yuan into Gold as
possible. This helps bolster the idea that China can pay their debts.
[https://bloom.bg/2I5TYME](https://bloom.bg/2I5TYME)

2\. China monetary policy is run through banks. When a bank is to far
insolvent they will make bad banks and put all of the insolvent loans into
those. [https://reut.rs/2WvG2zb](https://reut.rs/2WvG2zb)

3\. When China has enough gold to give external investors confidence they can
sell off half of their Treasury holdings, create the good / bad banks, and re-
engineer the economy. Leaving foreigners on the hook.
[https://bit.ly/2H7zdxf](https://bit.ly/2H7zdxf),
[https://bit.ly/2vOA1li](https://bit.ly/2vOA1li),
[https://s.nikkei.com/2WgZRuD](https://s.nikkei.com/2WgZRuD)

4\. The world wants cheap stuff. While foreigners will be unhappy they lost
their investments they will keep buying from China and China will have a soft-
landing from this upheaval.

5\. China won't at that point be able to afford to buy any treasury bonds. The
US Treasury will be forced to print money and inflation will go up along with
various problems. This will force investors back into China because the US
doesn't look like it is any better off then China is. It is a lot like someone
who declares bankruptcy being able to get credit again pretty quickly.

6\. To make sure productive members of China's society work China could make
less productive members into caregivers helping to relieve some societal
stress.

7\. China's government owns part of a lot of private and public companies
along with China Utilities. They can raise money by privatization like France
has done. [https://on.ft.com/2lN2x1F](https://on.ft.com/2lN2x1F)

~~~
MR4D
Some responses:

#1, China is going to have to buy _a lot more_ gold. They only have about 1/4
as much gold as we do. And if they buy too fast, they'll push up the price,
which hurts their currency. Not saying you're wrong, but there are limits
here. [https://moneyweek.com/499249/how-much-gold-does-china-
have-a...](https://moneyweek.com/499249/how-much-gold-does-china-have-a-lot-
more-than-you-think/)

#2 - many ways to deal with this, but it has to be in balance

#3 - I don't understand your - can you elaborate?

#4 - not at the cost of seeing their economies whither up and disappear. An
aging demographic curve in most countries is already going to do damage -
giving the rest of the country away won't help. We're already seeing increased
protectionism around the world in different forms (e.g. the US with tariffs,
the EU with regulations, etc.) One example is here:
[https://www.nwitimes.com/business/local/arcelormittal-
idling...](https://www.nwitimes.com/business/local/arcelormittal-idling-steel-
mills-in-europe/article_e635ff12-b2d1-5380-b67c-18db0cdc099d.html)

5 - Not all bad things are created equal. Check out this and read the text
next to the graph titled, "China Population Growth":
[http://worldpopulationreview.com/countries/china-
population/](http://worldpopulationreview.com/countries/china-population/)

6 - this doesn't work with an aging population. The demographic curve hurts
(see #5 above)

------
baybal2
About the news. Well, that's it. After one guzzles on debt which he has no
chance to repay, a bankruptcy usually follows.

A lot of Chinese elites are financially inept, and that is not limited to only
ones who were born before seventies.

That twisted version of financial "science" was born during China's nineties,
out of numerous "get rich quick" schemes, and is now being taught as "the new
truth" in reputable Chinese business schools.

The few companies from that era that managed to miraculously survive and turn
into more or less normal profitable enterprises were then labelled as
"examples to emulate," to disastrous results...

Lenovo ( _a huge real estate player in China,_ ) HNA, Wanda, Oceanwide-
Minsheng, Guotai Junan, Poly, Fosun, Pingan... all built along the same
template: ridiculous real estate investments as a collateral for equally
ridiculous loans on which the rest of their group companies run.

------
AFascistWorld
China has estimated 40 trillion yuan of local government debt (no one knows
exactly how much), since no one will ever be held accountable for it, cities
are essentially borrowing nonstop like there's no tomorrow coz you know free
money why not.

贺铿, member of the National People's Congress Financial and Economic Affairs
Committee, claims not single one of the cities planned to ever repay. Some
even struggle to pay interest.

~~~
metalliqaz
Most of the cities are likely correct, thus they made the correct move. They
will be bailed out just as happens everywhere else. Perhaps the central
government even likes this arrangement, because it allows them to basically
wipe out cities that don't fit into their plans for the future.

~~~
simonh
You can wipe out the city, but somebody still needs to pay the debts.

~~~
cc439
As best as I can tell, the Chinese government's plan is to externalize the
effects of all the debts that turn bad. At the end of the day, foreign
investment in physical assets (factories, equipment, supply chains, etc) and
infrastructure cannot simply be repossessed, especially under the auspices of
a fiercely nationalistic and dictatorial Chinese government. If Chinese debt
holders are no longer able to meet their obligations, the Chinese government
will step in to secure the debts they hold and nationalize/seize whatever
valuable assets are held by foreigners, effectively offloading all their
financial problems on the rest of the world. What recourse will a company like
Apple have against a sovereign nation no longer willing to play by WTO rules
since they have grown strong enough to ignore all but the most sincere
military threats?

~~~
simonh
Hi China, good luck buying oil without any Dollars.

~~~
cc439
China's recent support for Maduro in Venezuela, condemnation of the US for
ending their exemption from Iranian oil sanctions, and their many energy
related treaties and contracts they've signed with Russia over the past decade
point to their understanding of this weak point. The Chinese have been making
all the right moves in positioning themselves as an alternative to American
hegemony for these energy-rich countries that have become targets for the
American destabilization machine. I doubt there will ever be such a thing as
the PetroYuan but the era of the PetroDollar might rapidly come to a close
should China goad the Maduro regime into putting their oil industry's
infrastructure up as collateral in return for Chinese investment in sorely
needed maintenance, upgrades, etc for that industry.

China is the only nation with the financial means (even if it's all funny
money as this article implies) to rebuild Venezuela's oil infrastructure that
has been massively underfunded to the tune of tens of billions of USD a year
for over a decade. The Maduro regime may be desperate enough to sign an
agreement similar to the ones China has been offering African nations whereby
a loan that will never be repaid is made with the knowledge that China will
wind up owning the assets put up as collateral when the country in question
eventually fails to meet their obligations.

------
whytaka
It seems that this is as intended by the government in a bid to shutter the
shadow banking market. The government continues to encourage leverage but only
through regulated means.

I wonder what defaulting on shadow loans means. What kind of protections are
borrowers actually afforded? To what extent will shadow lenders try to
recuperate their loans?

------
duxup
Some random questions I always wonder:

Do we really have reliable numbers as far as public debt in China AND what the
central government has as far as money, and what they could do about it?

Could China now be large enough that they could just ... cancel some debt and
tell the world "That's right, we did it, you gonna just not do business in
China?"

~~~
dageshi
I believe the huge majority of debt in china is held by the chinese
themselves, very little is actually held by foreigners, so were they to cancel
debt they could easily do so with little knock on contagion to international
investors.

~~~
MuffinFlavored
What effects would them cancelling their own debt that they hold have? Their
currency should inflate because of that... right? But it won't?

------
zachguo
Why China's Bonds Are Defaulting at a Record Pace

[https://www.bloomberg.com/news/articles/2019-02-20/why-
china...](https://www.bloomberg.com/news/articles/2019-02-20/why-china-s-
bonds-are-defaulting-at-a-record-pace-quicktake)

------
toomanyrichies
If someone wanted to price this into their models, where should their short
and long positions be if they assume a massive financial crisis in China
within the next (say) 10 years?

Asking for a friend. :-)

