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Two Large Chinese Borrowers Miss Bond Payments, Sources Say (bloomberg.com)
275 points by docker_up 8 days ago | hide | past | web | favorite | 129 comments





Uh oh. Wintime, which is a coal mining operation, owes about US$46 billion. They did a financial restructuring last year, and now they can't make the payments on that. "Wintime's original plan was to borrow to fund acquisitions and expand into areas including finance and logistics." That didn't end well.

China has "modernized" their bankruptcy system since 2007, with a more pro-creditor legal system and new bankruptcy courts. China now allows defaults, creditor-in-possession operation ("Chapter 11" in the US), and most of the other creative stuff seen in US debt finance. Now companies in China can try all the stupid debt side stuff we see in the US. But without enough people who've seen it before on the lending side to evaluate credit risk.

In 2016, President Xi Jinping began putting emphasis on reining in financial risks. The tolerance for creative financing was reduced. Wintime's expansion plans may have been caught by this.[1]

[1] https://www.smh.com.au/business/markets/looks-like-a-ponzi-s...


> (Chapter 11" in the US), and most of the other creative stuff seen in US debt finance. Now companies in China can try all the stupid debt side stuff we see in the US.

In the wake of the recovery of the 2008 financial crisis much was written about how these sorts of structural bankruptcies in the US left everyone better off than the bankruptcy laws in e.g. much of Europe. Here's one such article:

https://www.forbes.com/sites/hbsworkingknowledge/2013/03/25/...

Why do you think policies like chapter 11 are stupid?


Chapter 11 bankruptcy is probably the single most factor at the forefront of American entrepreneurship and how the US propelled to be the strongest economy in the world. I have a feeling GP is talking about the lack of expertise in China to handle it correctly.

That is a strong claim, and one that directly opposes my understanding of the situation.

As a classic example, consider the US airline industry. Being in Chapter 11 bankruptcy is a competitive advantage, so one airline after another goes bankrupt, becomes competitive, and comes out, having driven another bankrupt in turn. This race to the bottom continues indefinitely.

Everyone knows that the industry would be better off if it lost a couple of airlines, but Chapter 11 keeps that from ever happening.


There are like 2 airlines in the world that are profitable. Nearly every airline is either supported by the state or losing money.

I don’t think airlines losing a ton of money is unique to the US and so I don’t think the US airline industry’s state tells us much about the effect of US bankruptcy laws at all.


> There are like 2 airlines in the world that are profitable.

Your premise is outdated. The US airlines are very profitable now and have been for many years. Consolidation has brought the market to a state of profitability as the normal condition. Their margins are solid and the corporate income tax cut took their formerly high tax rates down to more reasonable levels that are globally competitive (eg Delta went from a typical 33% effective rate down to 24-25%).

Operating income the last four years combined:

Delta $24 billion, American $21b, United $18b, Southwest $14.5b, Alaska Air $4.7b, JetBlue $4b, Spirit $1.8b

All of those airlines have been profitable every year for the last five fiscal years (both in terms of net and operating income). So that's seven consistently profitable airlines just in the US market. Air Canada has also been profitable every year for the last five years.

This change to their business condition is also why Warren Buffett has gone through and purchased the max position he can in all the majors (Berkshire owns just under 10% of Delta, Southwest, United, American). He regards them as having gone through a consolidation transformation akin to the railroads, which took the US railroad industry from being a frequent basket case to consistently profitable (leading Berkshire to acquire Burlington Northern).


>There are like 2 airlines in the world that are profitable

What? random search: https://en.wikipedia.org/wiki/World%27s_largest_airlines

at least 10 that are profitable


Under what time horizon? Of the top 10:

  American Airlines went bankrupt in 2012
  US Airways (took over American) went bankrupt in 2002, 2004, 
  Delta went bankrupt in 2005
  Continental went bankrupt in 2010
  Lufthansa, Air France, IAM (British Airways + Iberia), China Southern, and China Eastern are state-supported.
  
That leaves Southwest and ANA as the only ones on the list that have neither been bankrupt in the last 15 years nor are state-supported. It's pretty strong support for the GP's point.

Add JetBlue, Ryanair, Cathay Pacific, IndiGo...there are a lot more than 2 profitable airlines worldwide.

But it is hard to compete with a rival that has explicit support from a state. Whether that be owned by the state, or with negotiating advantages from an arrangement like Chapter 11.


Funny when Cathay Pacific is listed among those, all the other three are low cost airlines, while Cathay are consider the "normal" or premium in today's world.

One reason Cathay got to be profitable is because they are one of the 5 largest cargo flight Airline in the world.


In what way is BA subsidised? It's been a private company for decades.

(I haven't looked into the orders.)


BA is a flag carrier. Russia only allows one airline per European country (and sometimes none) to overfly Siberia. That the government of the UK continues to pick BA as its flag carrier amounts to a state subsidy.

This is something the EU has tried to address in the past, but not much can be done about it as Russia imposes the policy unilaterally.

But regardless of how it started and who's to blame, the net effect is that when BA flies from e.g. London to Tokyo they can pick a shorter route than their competitors, this makes them much more profitable than they otherwise would be. They effectively hold a state-sponsored monopoly on certain routes.


> Lufthansa, Air France, IAM (British Airways + Iberia), China Southern, and China Eastern are state-supported.

Source for this claim for each of these airlines. Given that subsidising industries/companies is banned in the EU I don't see how any airline in the EU could be receiving state support. I'd say Ryanair and Easyjet and a bunch of others would be hollering about it from the roof-tops.

I get that China Southern and China Eastern are state backed at the administrative level, but neither is the flag carrier (Air China is) and both are publicly traded? Are they actively state sponsored since they were set up?


Lufthansa, Air France, and British Airways (IAG) were all privatised over 20 years ago.

Where is the state support?


Not parent, but my guess would be while they don't have state support, but they do get preferential treatment?

No they don't, that would be illegal under European state aid law.

> Chapter 11 bankruptcy is probably the single most factor at the forefront American entrepreneurship and how the US propelled to be the strongest economy in the world.

I'm not saying it isn't important, but that is a bold claim. I would love to hear your argument as to why.


(IANAL. I'm not even from the US. Some of this information may not be very accurate)

I'm not sure I can do it full justice either but here it goes - US bankruptcy laws are the oldest in the world. During a time when it's not uncommon for people to go to jail and be indentured to their debtors for their inability to repay the debts, US made a bold law that allowed for debt forgiveness and gradual repayment. US bankruptcy laws also made it possible to separate the property and responsibility of the company and that of the individual managing the company. This allowed for greater experimentation - because it's OK to fail without fear of persecution or losing all of the entrepreneur's property when a company fails. One more important factor is the ability of a company to declare bankruptcy and continue to operate - instead of getting divvied up to pay for the creditors. This resulted in companies that would otherwise be shutdown a second chance with restructuring and delayed debt payment. This is a long term view and is good for both the company and the creditors. It prevents short-term creditors from carving up the assets and closing down the company.


No they're not. The first 'corporation' as we'd recognize it today was the Dutch East India Corporation, which was founded before the US even existed. It already split liability of the corporation from that of the officers running it.

Yeah, but you had to get a Royal charter to create a limited liability company in those days. New York passed the first modern legislation allowing individuals to create LLCs/PLCs; the UK followed suit some decades later.

While the Wikipedia article for 'limited liability' somewhat hints at NY being the first place where 'limited liability' was a legal concept accessible to all (although I'm not sure why that article does that - it's probably an unintended side effect of its main point being a history of Anglo-Saxon law regarding limited liability companies as we know them today), the French 'Ordonnance de Commerce' of 1673 (!) already codified limited liability partnerships in which investors were not liable for more than their contribution in the company. They could be founded by mere 'notarial deed' (although this translation doesn't really capture the nuances of the concept in civil law). Of course those were not the same as today's (Anglo-Saxon) LLC's and PLC's, but my point was that protection of investors in bankruptcy was something that emerged in the 17th century, at the very dawn of 'capitalism' as we know it today, and it's not something the English invented. I've thrown out most of my law school books on legal history and I don't remember all that much about the details, but any law school library has literally 100's of books on this exact topic, it's not like this is something controversial.

I really wish the people that downvoted you had the maturity to respond with their (presumed?) rebuttal; I know little about the topic and was following the conversation with interest, but I have no idea of whether this comment's claims are sound or not, given the juxtaposition between the lack of responses and the downvotes.

I mean, now I'm going to look up what I can about the topic, but it's just such a frustratingly immature habit that lowers the quality of discourse here. /rant over


I share your frustration. If they're wrong, please expand on why for the elucidation of others.

There's a pretty interesting book on it "The corporation that ruled the world". It talks mostly about the British East Indian Company but that was modelled after the Dutch one.

I'm not the original commenter, but I've heard similar things in the past. I did some googling, found an article discussing the concept: How Chapter 11 Saved the US Economy, https://www.forbes.com/sites/hbsworkingknowledge/2013/03/25/...

Choice quote:

"Because of Chapter 11 and the expertise of US restructuring professionals who advise troubled companies, Gilson says America's economic recovery has been far speedier than Europe's, where bankruptcy laws tend to favor immediate payback of creditors.

"Many countries around the world have bankruptcy laws that primarily seek to liquidate distressed companies," he says. "The emphasis is on reimbursing creditors, or protecting particular stakeholders such as employees, rather than doing what's necessary to rehabilitate the business."


> "The emphasis is on reimbursing creditors, or protecting particular stakeholders such as employees, rather than doing what's necessary to rehabilitate the business."

Don't mean to go far off-topic here, but I can't help but think why we can't try to apply similar principles when operating the corrections system (e.g. rehabilitate the criminal rather than focusing on punishment / appeasing stakeholders like family of the victim), and whether that would yield similar success or is even possible.


The actual focus is on crime prevention. While criminals are incarcerated they aren't out victimizing other people. More rehabilitation would probably improve the situation in the long term, though.

Planet Money did an episode on this subject in 2017:

https://www.npr.org/sections/money/2017/10/04/555646290/epis...


Not OP but the argument is probably that it allows people to experiment, try new things and fail while still allowing entrepreneurs to try again. For example Henry Ford went bankrupt multiple times before creating one of America's greatest(at least in terms of age) companies.

Everybody better off, or just those who were holding ownership of unsafe businesses? Isn't the whole point of capitalism that failing businesses fail so that new and better businesses can take their place? Yeah it sucks for those people that failed, but their continued existence, despite not being profitable or stable, stands in the way of new and better business rising in it's place.

If you could underline a single event in world history that could be called "the birth of capitalism", it would be the invention of the LLC by the Dutch Republic. Historically there has been no shortage of creditors using the long arm of the law to guard against moral hazard. Capitalism took off because of limited liability and bankruptcy law. Feudalism is an economy stuck in a local minimum because there's not enough new blood being entrusted with capital. Mix up the capital distribution a bit more, and yes there will be more business failures. But that capital will also find its way into the hands of entrepreneurs who are more skilled than the creditors. It's VC investing writ large: lose a little on most, make a lot on a few.

> Isn't the whole point of capitalism that failing businesses fail so that new and better businesses can take their place?

Yes, and that's why Chapter 7 bankruptcy exists. Not every failing business can opt for Chapter 11.

Chapter 11 gives businesses that can still succeed an opportunity to do so, without having to make the time-consuming full round trip through liquidation to startup to scaling to functioning business again.

If it works, it benefits employees and customers who depend on the operations of the business, and it benefits the creditors and investors, since a profitable business will generate more money for them over time than a one-time liquidation would.


There is nothing stupid with Chapter 11. The owners get nothing until all creditors are made full, so the incentives work just as well as under alternative regimes. The difference is simply that there is a chance for the business to continue. Which is really better for all involved, creditors, employees, customers, and vendors.

The alternative alternative, i. e. starting from the assumption that business must shut down, is really a legacy of the times when a business and its owners were hard to separate. There may also be some sort of misplaced morality at play, where „Radio Shack must die“ to atone for the sin of running out of money.


What about the contractors that get regularly screwed over from this? "Sorry, I know we agreed to pay for your time and work, but we declared bankruptcy and paid off most of the bank's debt and nothing is left for you small fry! Good luck sueing us with your non-existant legal team! I just got a bonus for fucking you over and saving the company the money!"

I worked for a small design agency that got stiffed on a six figure invoice this way. There was absolutely nothing they could do about it and the bankrupt founder didn't even bother apologizing. It almost killed a 10 person company that the studio head had spent a decade building up from a sole proprietorship.

The design agency shouldn't have extended so much credit in the first place.

If the company goes away entirely, the contractors and suppliers are even more hosed. Example would be the US auto industry. Whether through bailouts or traditional bankruptcy proceedings, it was considered vital that the businesses themselves remain operational to keep their supply chains intact.

'Chapter 11' is not really bankruptcy. Well it is in the US legal sense, but it's not really in the common use sense of the word.

If you sign a contract you assume counterparty risk.

Don't sign contracts with companies that have garbage credit ratings. Or if you do, get money up front.


And how is some small contractor suppose to properly vet a business worth 100 million or more? Why would they ever assume they wouldn't or couldn't pay for their services? Why does the contractors get shafted over everybody else instead of getting an equal percentage of their owed debt payment like everyone else?

> And how is some small contractor suppose to properly vet a business

Ask for their credit rating.

> Why does the contractors get shafted over everybody else

Because that's how the contract is written. Don't like it? Get paid up front in senior security notes.


The owners get nothing until all creditors are made full

The stockholders get nothing. The management, though, can do quite well for themselves in a Chapter 11 reorganization.


Your explanation and the quote you are explaining mean the same thing.

No it they don't, because they make different predictions about incentives. Allowing the business to operate in bankruptcy cam, under certain conditions, give managers to incentives to drive the business into bankruptcy.

For better or for worse, that makes the incentives different from alternative systems.


>Which is really better for all involved

Not for better managed competitors.


Well, as part of the reorganization, the company needs to find new capital. If they are deemed badly managed, and any new plans aren’t convincing, they will have a hard time doing so and will disappear. It’s really like a startup rising from the ruins of the previous attempt.

I think the old business will have a far easier time managing to secure capital and loans than a new entrepreneur, which is a boon for the guys already with money and being paid big bucks to administrate, but pretty horrible for the small guy that has newer and better ideas.

Who aren't parties to the bankruptcy, so who cares? The public benefits from increased competition.

I'm not against Chapter 11, but whether or not the public benefits depends on the specifics of the case.

Sometimes unproductive companies are kept in business for far too long because there is political pressure.

In the long run, it's not good for anyone if workers remain in unproductive jobs instead of moving on. It depresses salaries, erodes skills and saddles the financial system with debt of questionable quality.

But Chapter 11 is certainly not a prerequisite for that. I think most zombie companies that are being kept alive never enter anything like Chapter 11.

So I think Chapter 11 is good and necessary to avoid the sudden death of companies worth restructuring.


Where are you getting the US$46 billion? In the article you linked to they have $10 billion USD in debt, and other recent articles have similar numbers.

IMO, not all that informed, This is the Chinese government picking winners and losers as it tries to deleverage itself from what it did in 2008.

(As a side note, China doesn't get enough credit for what it did in 2008 to stabilize the global markets. It and the US literally spent their way out of what could have been a very brutal global recession)

Last year they bailed out HNA. Lots of chatter that HNA was bailed out because it had done some very high profile deals in the first world and China wanted to protect its reputation.

https://www.bloomberg.com/opinion/articles/2018-01-24/hna-sh...

The good news for the world is that Chinese corporate debt isn't held that much outside of China, due to tge double whammy of

1) investors valuing their chance of payback on a default like sovereign debt(large haircuts, very little leverage to get any say in the proceedings)

2) investors valuing the chance of a default like a corporate bond( much higher than sovereign defaults).

This means it has the worst of both worlds from a risk perspective but does pay a larger coupon. And if you are a distressed credit investor you have the same problem that is now an issue in most markets. You can be right about the default chances but the government could still swoop in and bail out the company making your fundamental analysis worthless.

The Chinese debt market tanking isn't going to hurt markets in a first order way. What could cause grief would be a scenario like the mid =80's where Japan almost on a dime stopped spending money around the world and brought it all back home to help fight their recession.

If China starts selling global assets, like housing in major cities around the world, and starts to decline their treasury holding rather than rolling them, then look out.


Chinese corporate debt isn't held much outside of China because of Chinese capital controls, too - domestic investors looking for returns are often constrained to domestic markets, thus bidding up prices and lowering returns. The same phenomenon explains in part the excessive real estate construction in China: there's often little other good places for domestic investors to park their money.

Is real estate still a "great investment" in China when you can't own property but merely buy 75 year leases? (this is my understanding of how real estate works at least in Shanghai)

A couple of things:

1. Everyone expects the leases to be renewed easily and cheaply. There was a huge scandal in Wenzhou when some shorter 30 year leases weren’t going to be renewed cheaply, the central government had to step in to keep up the appearances that the leases were merely a formality.

2. China doesn’t (mostly yet) have property tax. Normal automatic deprecation on property through taxes doesn’t apply.

Now who knows what will happen when a property tax is inevitably introduced...


Both points seem to point to real estate being a bad investment?

1) local governments have already been to tempted to squeeze revenue out of lease renewals, who knows what they’ll do in the future

2) a property tax is inevitable and unknown...


True, but the main reason property is a bad bet is a way too huge property bubble. Urbanizing farmers aren’t going to save the day and pay you $1 million for your extra 75 sqm apartment.

In Shenzhen, the municipality has no issues expropriating land rights of 20 year lease holders.

One my coworker ran into a situation with his landlord:

1. He gets a call from his family "Police knocking on the door, they have an eviction notice"

2. Guy angrily calls the landlord

3. Landlord say WTF and rushes to the scene

4. It was later realised that his flat, that was bought and sold god knows how many times, had its lease expired, and the landlord was not even aware of him having to extend it.

5. He had to relocate his family overnight to friends and coworkers


Real estate is not a great investment in China. It's less bad than the domestic alternatives given Chinese capital controls and financial policies.

Some real estate in Hawaii is also "sold" in this way. The price of "Leasehold" property is generally less expensive than "Fee Simple" property.

https://www.mauirealestate.net/fee_simple.html


Is real estate in America a great investment[1], when despite owning property, you have to pay 2% of its value in taxes/year? In a mere 50 years, the government will own your entire property!

China's property is leased... But as a converse, it doesn't have any property taxes.

At the end of the day, the difference between a fixed-term lease, and a property tax are largely academic. (With a bit of economic weirdness, close to the roll-over period of the lease.)

[1] Which also begs the question - should real estate be a great investment? Nobody cheers when the price of staples and groceries goes up...


Nobody cheers when the price of staples and groceries goes up...

Because nobody buys groceries with massive leverage over 30 years.

People buy houses because they count on inflation to raise the nominal value of the leveraged asset far more than the interest they pay, and usually in the long term that works out and they pay less than they would renting (not always, and renting has upsides too of course).


> People buy houses because they count on inflation to raise the nominal value of the leveraged asset far more than the interest they pay, and usually in the long term that works out and they pay less than they would renting (not always, and renting has upsides too of course).

The problem of course being that for this to be true, housing price inflation has to be greater than general inflation, which implies that nominal housing prices increase faster than nominal wages.

Which is what has happened, but that isn't sustainable, and the math is pretty harsh.

If housing prices increase by a given percentage at the same time as they increase as a percentage of wages from 30% to 45%, then for them to increase by the same percentage during a period of time with the same level of wage growth, they would have to increase from 45% to more than two thirds of wages, which is implausible. To increase by that percentage again would leave them at more than 100% of wages, which obviously can't happen.

So the trend of housing price appreciation above general inflation is inherently temporary. It has to end eventually, if it hasn't already. Note that current housing prices were never really allowed to crash in 2008 and continue to be artificially propped up by low interest rates. So we may be preventing them from falling presently, but that doesn't mean they've got a lot of room to grow any further.

But people who already own property may want them to, or be expecting them to. Those people are likely mistaken.


The problem of course being that for this to be true, housing price inflation has to be greater than general inflation

In real terms I agree house prices oscillate around zero growth (sometimes with decades long periods of higher or lower growth).

However, the leverage makes a difference. If you know bank policy is constant inflation, taking on large debt to buy an asset which tracks inflation makes sense in the long term. Over time the debt becomes less and less significant, and the asset price and yield tracks inflation/wages.

If you could borrow multiples of your wage at low interest to buy stocks for decades the same argument applies - the yield in future will outstrip the cost.


> Nobody cheers when the price of staples and groceries goes up...

Except those who hold the groceries and staples? I'm no investment expert, but my understanding of the value of real estate is due to the scarcity (when taking into account the cost of improvement and demand.)


On the news you'll hear that the housing market has "recovered" and is now "healthy" when prices increase.

When food and gas prices go up we don't say that. We worry.

The narrative has been completely taken over by property owners.


>you have to pay 2% of its value in taxes/year?

Sorry for being naive, that is the first time I heard of property tax in % of value every year! No wonder why so many comments were referring to what happens to China when they introduce property tax.

Coming from places where we have tax, but none of them are as high or based on its property value. Isn't that basically "renting" the property? For a million dollar value flat I have to pay $20K Every year? Or $1.6K every month? That is pretty insane if you ask me.

And why are people continue investing in US housing? So these tax, assuming being paid by its owner, are basally passed on to the lease? So a rise in property value will add an extra 2% effect on its rental pricing?

I would have thought property tax should lower the interest of investment in property, but that doesn't seems to be the case in US.


Okay this sounds crazy, why on earth would anyone tax the market value of the building or apartment? Generally the idea is to tax the land not the property. This way multi family homes can split the tax burden vs a single family home paying the full tax.

You're right. Taxing the cost of the land + the cost of the building is insane.

Unfortunately, that's exactly what every municipality in the United States is doing, right now.

Most economists believe that only taxing the value of the land would be better public policy.


pay 2% of its value in taxes/year? In a mere 50 years

<pedantic> More like 36 years. </pedantic>

There's a quick trick to a good approximation for this. The rule of 72 says that you can estimate the time it takes a compounded investment to double by dividing the interest rate by 72. 2% for 36 years will double the investment (or, since your actual statement was going the other way, strip it to nothing)

See, for example, https://www.investopedia.com/ask/answers/what-is-the-rule-72...


There’s no compounding here, since the property tax is a fee and not a reduction in the value of the asset, so I don’t think that’s applicable.

It's not a direct reduction in value, but I would think if the fee went away the value would still increase.

That's for compound interest. In this case, assuming the value of house stays the same, it does indeed take 50 payments of 2% of the total value until you've paid the full price back to the government.

Assessed value which is usually lower than market value.

As long as one sells their property within 75 years, the investment functions the same as it does in the US. Each new buyer of a property gets a new 75-lease.

At least this is the way my wife (who is Chinese) explained it to me.


> Each new buyer of a property gets a new 75-lease.

That's not a rule, and technicalities vary greatly from one municipality to another.


In the 80's it was Japanese corporations that lost their shirts with US assets, but is housing a corporate or individual investment for Chinese? My understanding was Chinese millionaires were just trying to individually invest in western properties (and get wealth out of China).

With their aging populations, it's unlikely dependence on US consumption can keep Japan, Europe and China going.


> If China starts selling global assets, like housing in major cities around the world, and starts to decline their treasury holding rather than rolling them, then look out.

Serious question, what would happen if they do this? Do you mean it could result in a decline of housing prices?


Don't they have large holdings of US treasury debt? Wouldn't a credit crunch in china pressure them to redeem their bonds, putting the US govt in a bind?

They can't redeem US securities, they have to wait for maturity or sell to a different entity.

Which could lead to higher interest rates if done en masse, which would definitely affect the US economy.

Assuming the Fed wants higher interest rates. Otherwise it can just buy them itself to keep interest rates in check.

"Otherwise it can just buy them itself to keep interest rates in check."

That would be no difference from "redeeming". Bond prices are determined by interest rates. When interest rate is the same as coupon rate the seller can sell for the face value of the bonds, equivalent to redeeming.


The difference is that the Fed pays the market rate, not the coupon rate, and by doing so at scale, the demand raises bond prices and reduces interest rates.

This is the opposite of what they've been doing recently -- selling bonds they already hold. Which is why bond prices are down and interest rates are up compared to a year ago.


On the one hand, talk about Chinese bond market blowing up are at least 8 years old at this point. On the other hand, combined with slowing growth, this might be a catalyst for some broader debt crisis [0]. US corporate borrowing is also ATH [1] and even for consumer debt we are currently at the highest autoloan delinquency rate ever [2].

[0] https://chinapower.csis.org/china-face-looming-debt-crisis/

[1] https://www.wsj.com/articles/corporate-debt-is-reaching-reco...

[2] http://fortune.com/2019/02/12/americans-late-on-car-payments...


Why is it an alarm bell if China is still growing at basically the fastest rate in the world? Is China's inflation super high that it needs a faster growth rate than other countries for some reason? China's population growth is quite low, so I don't see why it would need a faster rate of growth.

I'm always confused why people make such a big deal of China growing at ONLY 5% a year. If the US grew at 5% this year, we'd be dancing in the streets!

Edit: Thanks for the comments, you guys are amazing!


Because China has a few long-term problems it's trying to grow its way out of:

* A baby bust left over from the introduction of the one-child policy, at which point its dependency ratio will skyrocket to levels unmatched in any other industrialized country. One phrasing I've heard is that China needs to get rich before it gets old

* Environmental damage that takes money to reverse (that is, to reverse while maintaining living standards). Environmental damage in the sense of damage to the urban environment that industrial workers live in, not just to wilderness areas - unbreathable air, toxic rivers, etc.

* A large rural population whose urbanization is unstoppable, and whose urbanization needs to be supported by jobs and housing to avoid the kind of slums you see in e.g. Brazil or Nigeria and attendant civil disorder. Which brings us to:

* An autocratic political system whose popular legitimacy is built on economic growth, and whose popularity will (in the eyes of the people running it) collapse if it can't deliver truly spectacular economic results.


Environmental damage that takes money to reverse (that is, to reverse while maintaining living standards). Environmental damage in the sense of damage to the urban environment that industrial workers live in, not just to wilderness areas - unbreathable air, toxic rivers, etc.

It’s also a matter of being able to grow enough food for 1.3 billion people, and in the absence of that, experience extreme dependency on foreign sources of food. Part of that is down to local pollution and mismanagement, but part of it also a matter of global climate change and desertification. It’s hard to be a superpower if you depend on your geopolitical opponents to feed you.


Reminds me of how the Soviet Union having to import simple wheat

To add to that cheerful thought, the Saudis are in serious trouble too politically, as their oil runs out.

So is Japan, as its population ages.

So is the US. So is Europe, although arguably to a lesser extent.

There's a possibility we're in for a perfect storm where a lot of very bad things happen all at once financially, just when we need to be spending money to mitigate climate change.


I understand anther part is, they can't afford to have unemployment either, especially in the restive uighur and Tibet regions.

Having millions of unemployed young men, without a political channel to air their grievances would surely spell trouble for the regime there...


Freakonomics has a chapter about the Romanian government being overthrown approximately 20 years after abortion was outlawed.

China's economy is different than western economies. You have the second industrial revolution style, ultra-competitive businesses, and then you have state-owned enterprises that basically exist to keep people employed and usually are financial stinkers that require implicit or explicit subsidy.

There are all sort of wacky machinations from the financial side of things that make Chinese numbers different than the west. You don't really know the quality of loans held by banks, etc. That type of crap gets buried in hyper-growth, and everything is wonderful until you cannot hide under growth. The US experienced this effect when it became time to pay the piper in 2008.


The first caveat is that China's numbers are not the same quality as the numbers from open economies; while perhaps not entirely fabricated, they are certainly tainted by influence and non-standard accounting and reporting practices designed to make the CCP look good.

More importantly, the key here is the trend. When there is both a large overhang of debt, and simultaneously slowing growth, that is a recipe for trouble. If the scale and scope is minor, it can possibly be managed into a 'soft landing'.

If not, it could easily get out of control, and spiral into a liquidity crisis for that economy, and since there are so many links between economies, spread overall.

The real question is whether this is just a blip in a very large and noisy environment, or if it is the crumbling of some critical supporting bricks in their economic edifice?


> Why is it an alarm bell if China is still growing at basically the fastest rate in the world?

How much is that growth due to spending loans on non-productive investments? Building ghost towns also contributes to growth.


I speculate that most of the growth is due to the urbanization of the population.

China's population isn't growing... But it's urban population is exploding[1]. Any other country that was seeing a 5% YoY adult population growth would be expected to see at least 5% YoY GDP growth.

Why would China be any different?

[1] And city dwellers in China sure as hell aren't living on a dollar a day. They are living nearly-first-world lifestyles.


The problems with Chinese real estate is twofold: - cities don't have the authority to raise revenue by introducing local taxes, but they can sell land to developers, thus fueling and endless growth (because as the city grows so does the need for more revenue) - due to the big imbalance of male-female ratio a lot of males have to compete, and since real estate is among the best forms of long term wealth store, a lot of flats are just empty but are held by men courting women (and the prices skyrocket of course due to this, which of course make the land sell-off an even more ephemerally lucrative thing; oh and usually families and friends give money so young men are able to afford these insane real estate prices, meaning the pressure is even greater to get married, stay employed, and repay the debt, etc.)

> The problems with Chinese real estate is twofold: - cities don't have the authority to raise revenue by introducing local taxes, but they can sell land to developers, thus fueling and endless growth (because as the city grows so does the need for more revenue)

It works the exact same way in the US, except instead of making money from selling land (Since they don't own it), cities make money by selling subdivision rights (Which let the developer turn fallow land into houses.)

Eventually, once the spigot of subdivision and upzoning cash runs out, property taxes are raised to cover any steady-state city budget shortfalls. The same thing will happen in China.

The system's not that different.


Incorrect. Localities can and do levy property taxes, which is where they get most of their ongoing funding (sometimes they levy local sales taxes as well). One-time impact/development fees usually go to building up the initial infrastructure needed to support those developments. They aren’t windfalls that can be used for running services in any ongoing way.

I’m not aware of any city that can actually sell subdivision rights? Property is bought and sold privately, the only leverage a locality has is in zoning and permitting (which is automatic unless exemptions are required, then many cities try to push in affordable housing requirements).

This is nowhere near the same as it works in China. Land transfer fees are the primary income of many localities after what the central government shares with them in VAT and income taxes.


Zoning and permitting are the subdivision rights that I'm talking about.

The trick is to zone the city as "X houses per acre", where X is a number that is not particularly profitable to develop. Then, hand out exemptions to developers, in lieu of cash. "Pay us $500,000, and we will change the rules, to let you make $1,500,000 in extra profit. Oh, and also, build out all the infrastructure that will service the area you're developing."

This is exactly how it played out in my village, and was a crystal-clear, above-board process. It was also one of the reasons that our property taxes were as low as they were.


>[1] And city dwellers in China sure as hell aren't living on a dollar a day. They are living nearly-first-world lifestyles.

This depends tremendously on the city. For Shanghai this may be true-ish, but there's much greater variation between Chinese cities and e.g. US cities.

Now take the lifestyle difference between NYC and Mobile, AL, but double it. Then multiply NYC lifestyle (e.g. income) by like ~0.6 (incomes are like ~0.3, but COL is a fraction of NYC excluding housing so the living standard gap is smaller than implied by incomes) to get Shanghai -- so use that as a baseline, but with the variation from the previous sentence. That's imo roughly what Chinese living standards are like (having been to Chinese cities of varying prosperity).


Yup, the investors are going to lose their money. So what. This won't start cascading bank failures though because the PBOC can print as much money as they want to recapitalize the banks without burdening the taxpayer. This is a fundamental difference between the western and european systems and is why China hasn't had a Japanese style deflation, even though it has been predicted every year since the early 90s.

Analysts have been getting it wrong for almost 30 years, yet they refuse to question their models because credit cycles are believed to be physical laws of the universe, when really they are artifacts of western financial policy. Namely, fractional reserve banking and all money as debt which the Chinese government doesn't follow.

I know what you're thinking now. "Fractional reserve banking" and "all money is debt" is a dog whistle for libertarians. Thus, this guy must be a gold bug, etc. No. I am saying that this is fiat currency, and that's ok. It's just not managed in the screwy boom-bust way that we have in the west that's specifically made to separate people from their assets every 8 or 9 years. Not everything China does is a good thing, but their financial system hasn't crashed in decades, so empirically it is a lot more stable.

matt4077 8 days ago [flagged]

This must indeed be first comment ever using the terms „fractional reserve bank“, „printing money“, „fiat“, „gold“, and „debt“, but not „inflation“.

Which is really a shame because it’s the obvious result. And also a very good way to specifically separate people from their assets. And also pensions.


Inflation issues are also down to another western belief - venerating 'price competition' as the only pure way to resolve resource conflicts.

The Chinese don't work that way. If there is a conflict for resources, those with the power just take them. If there is compensation offered for that, those without the power just get given it - and probably consider themselves lucky.

The Chinese show you can have a system where you set a price, even one as low as zero, and then use coercive power to force people to take that price.

Those with power don't need to get into price competition. And if they don't get into price competition, then prices won't go up. Inflation is killed at source.


Gold bugs and libertarians believe in the epically flawed quantity theory of money. Inflation can be controlled if it is used to build capital that increases efficiency and thus lowers the cost of oroduction. If newly created money flows directly into asset speculation via the western system of lending against assets to buy other assets, then this creates inflation. The western system also has the side effect of rewarding lazy money thst doesn't need to make anything to see itself grow. All it needs to do is follow the newly created money into whatever asset class is currently in fashion.

This is actually a positive development in the long run. A few years ago my father, who lives and invests in China, boiled down the basic investment strategy in China to: invest in big companies because the government will always bail them out. If that's what everyone believed then you can see how some very poor decisions can be made and debts can balloon without end. Disasters like these will remind Chinese investors that there are risks. There are no free lunches and be prudent about your investments. This is part of the process of modernizing the Chinese economy.

Wow. Wonder if this is the canary in the coal mine for the Chinese economy slowing down.

s/China/Global

Everything is connected and this level of debt has never been seen before. Next decade should be an interesting ride


Because of Chinese capital controls they're connected less than one might expect.

Well, unless you are into Vancouver real estate.

Buy at the bottom.

About as likely as the last 10,000 times the Western media has predicted the collapse of the Chinese economy.

There are experts predicting economic recessions in the US every single day, no need to bring a West/East nationalistic divide to it. They are mostly wrong about US too, but it doesn't mean that recessions don't happen. It just means that experts in general are extremely bad at figuring out when crisis happen. There will always be a couple of lucky experts who got it right and will make a career out of it...

Some day China will go through a major economic crisis too, claiming otherwise is an extraordinary claim requiring extraordinary evidence. Figuring out when it will be hit by a crisis will probably be obvious... post-facto.


This doesn't mean crisis will change much after a recovery, like it didn't in US, many European countries, etc.

Yes but if you get it right then you're a genius, and get a book deal, and an even better paid job, whereas if you're wrong, everyone forgets. It's a free lottery ticket.

My considered opinion is we'll go into recession in July 2020, obviously based on prevailing macro economic trends, not blind guesswork.....


The good thing about the UK is we actually have our recession timetabled out in advance.

Ouch

The S&P 500 is up 40pts today, although unrelated, is evidence that the market is not concerned. Missed bond payments happen all the time. In 2014-2015 many oil and drilling companies missed payments when oil prices fell. This sector is very volatile. .

I think the US markets aren't concerned because Chinese corporate bonds are basically internal to China. In otherwords, USA exposure to Chinese credit problems isn't that great?

How much of this is legit missing, and how much of it is a ploy (?) to restructure payments? That is, is a temporary hit to reputation / confidence acceptable if the longer term benefit to the bottom line is significant enough?

Good luck trying to get cheaper financing after missing a few payments.

Yes and no. In the case of China and the Chinese gov, well that's not Wall Street.

Why is this link keep getting posted repeatedly?

16 hours ago it was already submitted here : https://news.ycombinator.com/item?id=19140804

Strangely, it was quickly hidden and one of the comments pointed to this explanation of how shadow banking works in China and the potential risk.

https://www.youtube.com/watch?v=auiGFRmD0tg

Essentially, these two large borrowers missing bond payment is a signal of worst to come.

It's not a question of if or when such crash will come but who will go down first and the big question: Can Chinese leadership be able to survive this time around? Deng Xiaopeng's remedy to deteriorating grip on the country was market capitalism, but now that it has proven to be largely a failure with half a billion Chinese living in poverty or barely what is considered Standard living in the west, with no political free will and expression protected, how long can the people bare it?

There are already signs of simmering tensions between the state and people. Much like leading up to the Tianmen Square incident 40 years ago in 1989, we are seeing similar themes - the rise of student activists with little to nothing to lose, a deteriorating economy now on the verge of misnky effect, now with a KGB puppet applying pressure via trade sanctions....

I estimate some major event taking place after the North Korea-America summit, the outcomes of that meeting will determine what chips China will use to get America off it's back.....

yup, you guessed right, another nuclear test this year along with ICBM/SLBM tests, launching skirmishes in NLL zone....

OR

another tianmen square unfortunately...as Chinese leadership realizes America's not about to go easy, it will have no choice but to kill it's own citizens who will riot when they los their jobs and savings.

The domino chips are all set in place, and it's just waiting for that final push.


"now that it has proven to be largely a failure with half a billion Chinese living in poverty"

What?

China has risen to superpower status, and become one of the biggest economies in the world in the space of a generation.

Are they as rich as the US per capita? No, but they're on the right trajectory, and getting there quicker than most other nations did.

Don't forget nearly all these city dwellers are first generation, if they don't remember living in a wood hut, without electricity, running water or toilet, their parents do.


Many countries have been able to rapidly modernize by copying Europe and the United States. But each country hit a wall after they were out of things to copy, and their economies slowed down. Both Japan and South Korea underwent rapid economic double digit annual growth, which tapered off as their economies matured.

China will probably hit a slowdown sooner than it should and before Japan or South Korea did because of its corrupt, authoritarian government


Yes, that doesn't negate the fact that China's growth so far has been very strong.

> superpower status

says who?

> Are they as rich as the US per capita? No, but they're on the right trajectory, and getting there quicker than most other nations did.

Japan thought the same thing up until 1989


China was a complete shambles in 1949. If you're implying China is now on par with Japan of 1989, they're doing great.

Japan is pretty much as rich as the US per capita.




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