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.
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:
Why do you think policies like chapter 11 are stupid?
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.
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.
Your premise is outdated.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).
What? random search: https://en.wikipedia.org/wiki/World%27s_largest_airlines
at least 10 that are profitable
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.
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.
One reason Cathay got to be profitable is because they are one of the 5 largest cargo flight Airline in the world.
(I haven't looked into the orders.)
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.
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?
Where is the state support?
I'm not saying it isn't important, but that is a bold claim. I would love to hear your argument as to why.
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.
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
"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."
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.
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.
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.
Don't sign contracts with companies that have garbage credit ratings. Or if you do, get money up front.
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 stockholders get nothing. The management, though, can do quite well for themselves in a Chapter 11 reorganization.
For better or for worse, that makes the incentives different from alternative systems.
Not for better managed competitors.
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.
(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.
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.
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...
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...
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
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.)
 Which also begs the question - should real estate be a great investment? 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).
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.
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.
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.)
When food and gas prices go up we don't say that. We worry.
The narrative has been completely taken over by property owners.
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.
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.
More like 36 years.
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...
At least this is the way my wife (who is Chinese) explained it to me.
That's not a rule, and technicalities vary greatly from one municipality to another.
With their aging populations, it's unlikely dependence on US consumption can keep Japan, Europe and China going.
Serious question, what would happen if they do this? Do you mean it could result in a decline of housing prices?
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.
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.
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!
* 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.
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.
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.
Having millions of unemployed young men, without a political channel to air their grievances would surely spell trouble for the regime there...
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.
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?
How much is that growth due to spending loans on non-productive investments? Building ghost towns also contributes to growth.
China's population isn't growing... But it's urban population is exploding. 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?
 And city dwellers in China sure as hell aren't living on a dollar a day. They are living nearly-first-world lifestyles.
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.
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.
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.
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).
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.
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.
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.
Everything is connected and this level of debt has never been seen before. Next decade should be an interesting ride
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.
My considered opinion is we'll go into recession in July 2020, obviously based on prevailing macro economic trends, not blind guesswork.....
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.
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....
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.
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.
China will probably hit a slowdown sooner than it should and before Japan or South Korea did because of its corrupt, authoritarian government
> 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
Japan : $40,849