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China defaults hit record in 2018, and the 2019 pace is triple that (bloomberg.com)
191 points by adventured 11 days ago | hide | past | web | favorite | 90 comments

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.

That's a commonly held belief and the underlying assurance for unrelenting speculators that the CCP has to prop up the property prices forever, since Chinese put majority of their wealth in these absurdly overpriced condos and it substantially absorbs inflation, a collapse will trigger the party's doomsday: popular revolts. It's a dangerous game everyone is forced to play.

The CCP dug its own grave here like many other things. It monopolized land and dictates/manipulates prices, hijacked the people and economy using the housing market, in turn it also assumed the responsibility.

Chinese are protesting and vandalizing when prices fall. https://www.google.com/search?q=%E7%A0%B8%E5%94%AE%E6%A5%BC%...

What about the over priced condos they are buying overseas? What happens when those prices fall too?

Serious question.

If I'm in China, and my money for taking care of my parents is in real estate, and real estate falls, and I can't take care of my parents, I am shamed. That's a really big deal in Chinese culture. And I'm mad at the government of China for this.

If I'm in China, and my money for escaping from China is in Vancouver real estate, and Vancouver real estate falls, then if I ever decide to escape China, I may have to work rather than be independently wealthy. That's not as big a deal as not being able to take care of my parents. And my anger is directed at Canada, not China, so it's less socially explosive. (Less explosive even to Canada - it wasn't their job to make it easy for me to escape from China.)

Or so it seems to me, a non-Chinese (and even non-Canadian)...

It's interesting to think about this worldwide in terms of dependency ratios.

Right now, there is a working-people boom globally, as most of the post-1950 baby boom is in their working years, national barriers to trade have fallen down, and the huge post-1985 population boom is entering the workforce. A lot of people are working, and there are relatively few old people to take care of. This has led to a global savings glut - people are financially saving some of their earnings to take care of their eventual old age.

This situation will not last forever - the global baby boomers will enter retirement, life expectancy is increasing, and the generation after Millenials (and their global equivalents) is tiny, with fertility falling off a cliff even in developing nations. That means fewer working people supporting more retirees. Technology has been stubbornly ineffective at increasing elder-care productivity, even as it's been very effective at increasing life expectancy. No financial engineering in the world can paper that over - regardless of how many dollars are injected into the economy, how much people have in their 401k, how much is in their bank account, and how many homes they own, there are still only a set number of people available to care for elders. Additional savings just means the price of elder-care will rise to soak up all the savings, and the price of assets will fall as people rush to sell them to afford the increasing price of elder-care.

The result is potentially explosive. People who assumed they have enough set aside for a comfortable retirement will find that a.) a "comfortable retirement" becomes increasingly more expensive and b.) the value of those assets is suddenly falling. There will be widespread calls for the government to fix things, but there's nothing within the government's power to fix: it still takes a certain amount of labor to help your grandparents out of bed, change their bedpans, bathe them, measure their medications, etc. So the chance of social unrest becomes dramatically higher, which means that maybe that escape plan of moving to Vancouver is pretty important. That just exports the problem, though, and destabilizes other countries.

>>>fertility falling off a cliff even in developing nations.

Does this mean kids born today will have better jobs, higher pay, cheaper real estate. This seems like a good thing.

No. Most economic activity is driven by consumption (usually future consumption, pulled forward in time via credit).

Only semi-accepted economics, but a boiled down version: https://www.youtube.com/watch?v=PHe0bXAIuk0

In short, if consumption falls, the economy can't help but fall with it. Which is what's commonly called a demographic time bomb. Especially in the US, where our social security systems are funded out of current workers, not by savings.

The only way to escape the trap (hypothetically) would be to invest heavily enough in capital expenses / automation during booming demographic times, implement a consumption-driving basic income funded by that boom, then throw up substantial barriers to prevent that money from trickling out to the rest of the world's economy (as without barriers you'd just be supporting foreign economies). This would look VERY different from business-as-usual as it's a 180 against free trade.

Demand outstripped supply, if you replace your standard houses with "commie blocks", it likely won't be as bad, but it's not going to happen.

1.3 billion people will produce a lot of winners, and they desperately want to keep their wealth safe somewhere like all the party officials do, that place won't be China.

Shanghai's average salary last year is around 11.5K usd, while an average 80m²/861sq.ft condo there sells for 558K usd(bare concrete, pay additional cost to do plumbing, wiring, flooring and furnishing), and this will be one at a very undeveloped part far far far from downtown in a city of 2,448 mi².

Far far far, as in across the Pacific ocean!

I saw a documentary that said most of the condos are owned by collections of families, is that right? And they buy third and fourth homes too. They all sit empty. Fueled buy municipal loans.

What will happen to the families who own all those condos that become worthless?

That kind of logic is necessary for asset price bubbles. The downside has to be minimized, and the upside remain significant. In reality, the downsides are huge and by the end, just doubling prices is incredibly hard.

The best I can tell is the Chinese debt cycle is well into the period where the loans are being taken out almost solely to pay off interest on existing debt. For Q1 2019, the debt increase was 9% of 2018 GDP (somewhere from Bloomberg.) That is a startling number. I presume that is private & public debt, but I'm not sure.

Presuming some sort of very large scale bailout occurs, and the debt is monetized, the renminbi should drop in value against other currencies and then China should experience inflation. That is the theory, at least. That isn't what happened with Japan. However, if you look at Japan, they are still fighting what happened during the 1980s. Per 2018 numbers, the Bank of Japan owns 77 1/2 percent of Japanese ETFs. All kinds of other distortions have occurred, and Japan is a very and complex issue in itself.

I don't think it is possible to predict what will happen. You can, to some extent, state that if X and Y happen then Z is impossible.

Analysts are looking at Japan and wondering what similarities or indications of what direction China could head in. There is some hint, but the Chinese people are much poorer and the Chinese government is quite different than Japan. The Chinese government also has a very close example to retro-actively observe while other investment driven growth stories like Brazil were quite distant both geographically and culturally.

The big unknown is, who is going to eat shit? Some big part or parts of the Chinese economy will. Who the government transfers the losses to determines what can and can not happen in the longer term.

There is a very good possibility that this will end in a poof, and China will not see significant growth again for a very, very long time. A lot of the stories being told about China's tech leadership look very similar to Japan in the 1980s. China's population pyramid isn't great either. Their population will peak in about 10 years and then begin shrinking.

Footnote: A lot of focus is on what direction prices go. A better focus would be on consumption power. When there is runaway inflation you can say, look the prices shot up I'm rich, but if your purchasing power dropped 90% you may be much poorer.

> The big unknown is, who is going to eat shit? Some big part or parts of the Chinese economy will. Who the government transfers the losses to determines what can and can not happen in the longer term.

Based on recent history, as long as it's everyone except the PLA, the existing Chinese political system will survive. Mao was right about that much.

Not that it isn't going to be extremely ugly.

If you could afford it as a Chinese citizen, you'd have to be crazy not to be hedging personal wealth outside of China at the moment.

If Kyle Bass is right about China's twin deficit:

If oil prices stay above $60 OR the U.S. keeps tariffs on China OR there is a global slowdown:

Chinese (and especially Hong Kong) real estate is in for a really bad time.

I want to point out, this isn't doom and gloom. Although China has a 90%! home ownership rate, prices could collapse 90% (they won't), and it would only affect speculators and people who bought their first home in the last 5 years (almost no one. No ordinary person can afford a first home).

See the 45 minute interview here: https://www.realvision.com/tv/shows/interviews/videos/chinas...

> prices could collapse 90% (they won't), and it would only affect speculators and people who bought their first home in the last 5 years

How do you arrive at that claim? ~78% of all household assets in urban China are held in residential housing ownership. A 90% housing price collapse would be beyond catastrophic to China's economy and household wealth across the board. In rural China, residential housing values represent ~65% of household wealth.

China's household assets being so extremely concentrated to housing is unique among major economies. In the US, the residential real-estate market represents closer to 35% of household assets (in the UK it's around 50%).

Financial assets are only 12% of urban Chinese household assets, compared to 43% in the US.

China can't afford anything to go wrong in their residential housing market, much less a 90% price decline.

Look at Chinese imports / exports: https://globaledge.msu.edu/countries/china/tradestats .

If the Yuan collapses, that's good for exports, which is good for jobs. If house prices collapse, it only matters if you're trying to sell your house. You won't need to sell your house if you have a job.

It's only bad if you're leveraged on real estate and dependent on prices increasing -- a speculator.

You know who is the most leveraged on Chinese real estate? Local governments and the mega rich.

The vast majority of Chinese spending is on domestic goods and real estate. If those things become cheaper, that's good for the average Chinese person (and for importers or Chinese goods -- I.E. everyone else in the world).

China's growing dependence on imported oil could be problematic. But they're being really smart about their unbelievably fast growing electric bus fleet.

It is important to note that a huge portion of Chinese jobs are related to real estate / construction. If the market collapses, a lot of those jobs will go away. But these aren't particularly high paid or specialized jobs. The growth of factory jobs should absorb them. The only thing that would stop that is if the U.S. increases tariffs farther.

I think it'd be more like Dot Com in the U.S. Stocks dropped like a rock, but the average person in the U.S. hardly noticed. I don't think it'd be like 07 -- even though it seems more related.

Don't most homes have very large down payments, so the risk is lower? Or is this outdated thinking in the age of 3rd and 4th "investment" homes?

Governments have a history of ignoring their academic advisors in the face of potential popular revolt. Falling asset prices have a history of causing popular revolt.

The world is crazy. Best to build that into your models.

The problem is that the longer the Chinese government steps in to absolve, tweak or undermine the market...the worse the market gets over time. It's like pushing on a string. Unfortunately recessions are necessary, asset prices sometimes need to come down because there is capital market misallocation. Unfortunately China is very hamfisted here and the longer the dance goes on the worse the potential outcome becomes.

The Fed and western policies get a lot of flak for "too big to fail" but in the end, they still let them fail...just very softly and to prevent systemic shock. That's not the Chinese model at all.

This story reminds me of a quote from Upton Sinclair: "It is difficult to get a man to understand something, when his salary depends on his not understanding it."

I've met many people in my life just like your classmate. They're especially common in the real estate industry. You're right, the world is crazy.

It helps me very much to read that quote right now. Thank you for posting it.

When making my cases at work, I need to frame the talking points from the perspective of how choosing my decision will benefit the person's salary.

I don't know if I like that realization, but it seems logical.

It doesn't feel good to manipulate people like that. I feel like they should know what's best for them and decide with the facts. But maybe they don't know better for themselves or their priorities in life are different.

To think about programming people like I think about programming computers feels dehumanizing. Like I shouldn't be doing it.

Like it's wrong to take someone's freewill away.

If everyone agrees that crazy is sane, then the mass delusion can stick until something forces it to be reevaluated.

That's essentially the definition of a bubble cycle: a mass delusion, eventually suddenly punctured by the imposition of reality.

> real estate prices being a risk.

Very much it, real estate is a collateral in great many gigantic debt packages.

A lot of Chinese multinationals have real estate wings exactly for this reason — providing a lot of collateral for loans and trust bonds.

The speculation is that a lot of real estate collateral is gigantically overvalued or simply does not exist

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

Here is the positive spin on the story. Defaults mean someone is taking pain for taking on too much leverage. That means relieving pressure from the system, which is–in the long-term–better for global stability than China trying to extend and pretend.

> 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.

That's also the view in the US (government will step in to make losers whole), which explains why bubbles keep re-inflating.

They have a history of making debt disappear into a black hole (don't ask any questions), for an in-determinant workout period. She's not entirely wrong. Which makes me wonder, why do credit risk analysis at all?

I learned recently that all land in China is owned by the government. Citizens can only obtain short and long-term leases for the use of land. It's slightly tangential, but does anyone know how this affects real estate prices?

land has only one seller,monopoly. the real estate price in china is crazy.

Didn't the US do something similar in 2008? They step in and take care of the banks.

“Chinese government will step in and take care of everyone

The US government very much did not do that. The US let a lot of banks fail and housing prices to collapse. They did save a few banks, and most bank customers. But, most of this was adding short term liquidity to the market and otherwise healthy organizations.

PS: “Mark to market” https://en.m.wikipedia.org/wiki/Mark-to-market_accounting is an important safeguard. But, it increases the short term risks of systemic collapse.

Not to mention that the Fed made a "profit" on the liquidity injection. "Profit" because central bank doesn't really care about anything like profit, but the point is everything was repaid.

That being said, there's a widespread belief called "Greenspan put" or "Fed put": https://www.daytrading.com/fed-put

It's hard to imagine central banks not making a profit on liquidity injection.

As long as they have a semi-accurate pulse on real asset values, as a lender of last resort they have the sole ability to buy assets at distressed values. Nobody else has the ability to take a bath as the market implodes and simply create new capital to buy things at less-than-face-value.

You'd only expect things to go really bad if the Fed mispredicted actual values.

Well, given how Western governments behaved when their private-sector real estate went into a bubble and caused a historic financial crash...

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

I suspect you might go far.

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?

Ownership doesn't mean the same thing in liberal democracies and in more or less oppressive countries. It's an abstract concept which gets translated into reality day by day, depending on other people's actions.

Sure, you may "own" a piece of land with a building on it that you had paid for, but the govt can seize it without repaying fair value. Or you may fully "own" a company, but you can only make decisions that fall in line with the party's line.

> Sure, you may "own" a piece of land with a building on it that you had paid for, but the govt can seize it without repaying fair value.

It can also do that in the United States, through particularly tortured (and often unfair) application of eminent domain.

But there is a tremendous difference in terms of degree. It can still be unfair. But it is not a common occurrence to the degree it can be in a country like china. We have the ability to appeal to courts. Powerful people can push around the weak, but there is also the ability to go the other way.

You can appeal to a court in China, too. When people's homes are bulldozed in it, they are also entitled to market value compensation.

It is just like eminent domain. And yes, people quibble over fair market value. They do so in the US, too. Poorer communities have been hit very hard by it.

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

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.

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)

More likely is that they simply extend the term.

Is that on the land or on each individual property? Does it get automatically renewed when the property gets transferred (sold or inherited)?

I could imagine there being a price drop on property nearing its expiration, so much so that there's no point in maintaining it if it just goes back to the government.

i have no idea. i have wondered just the same. what happens with the value when the time is up? maybe we can look at how time leases work in the UK or canada as suggested below.

also, in china maintenance is only done when necessary and when it brings profit.

That's why they are spending billions building infrastructure in Africa (and loaning the government the money to do so)... highly recommended book on the topic of how this works:https://www.amazon.com/dp/1626566747/

I encourage you and people who share the same opinion as you to read alternative perspectives on the matter [1]. One should not be so quick to assume that Africans don't know what they are doing and don't know what's best for themselves.

[1] https://www.nytimes.com/2019/04/26/opinion/china-belt-road-i...

Many of these giant belt infrastructure projects have only been approved by what appears to be bribery of the public officials. In multiple countries there have already been issues with Chinese financed large projects that appear to be un-affordable to extreme degrees, like in Malaysia. It appears that to me based on what has already happened that they are at least frequently unsustainable, and what happens is the original local control over new ports etc very frequently falls into Chinese hands once the high costs become apparent. Too early to say about Africa, but just look at Malaysia.

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.

Thanks for posting this, it was well written and seems rational.

One potential domino you left out is what happens if the Chinese economy crashes and they can no longer buy US debt, if this happened and the US had to start inflating their currency it seems like that would be the worst possible scenario, globally speaking

I don't think it will be an issue, for two reasons:

#1 - They only own about 5% of US government debt anyway (about as much as Japan) [0] [1]

#2 - They actually own less than they did a few years ago [1][2]. This tells me that their buying has become somewhat inconsequential already.

[0] - https://www.thebalance.com/who-owns-the-u-s-national-debt-33...

[1] - https://money.cnn.com/2015/04/15/news/economy/japan-china-us...

[2] - https://www.thebalance.com/u-s-debt-to-china-how-much-does-i...

EDIT - I meant to also say thank you!

No one has a real worry about this cause the world needs more dollars because of the debts they'll owe to china. The debt to china is very much not a fear.

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?

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

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

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/2vOA1li, 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

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...

#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...

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/

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

I don't know yet - still working on the problem. A few ideas below.

Cash (actual stuff you can hold in your hand, not the plastic stuff) in small denominations. A few thousand in 10's and 20's offers a lot of flexibility to deal with short term issues.

US treasury bills.

Dividend paying stocks, especially ones without a lot of global exposure. Not sure yet, but utilities might be good, but I haven't figured out the impact of interest rates which complicate that problem.

I'm not a fan of gold. It's hard to hold, harder to spend, but if currency valuations fluctuate wildly, a bit might be helpful, but only the stuff you can hold in your hand - a gold fund might not help much, but that's a completely different discussion that I'm not qualified to offer a good opinion on.

Imagine you were able to find the magical instrument to bet on this event. Let's simplify and say its based on shorting both RMB:USD and these secondary foreign real estate markets. (the details don't really matter much for this argument)

I first heard this IDENTICAL storyline in 2002. This magical instrument has been shit over the last 20 years. RMB:USD is suspiciously flat by design. Real estate in Canada as mentioned has skyrocketed.

The long term bet you are proposing has failed 4 for 4. Your near term bet has failed 10+ out of 10+.

Aren't all macroeconomic short plays, by design, about timing?

In other words, they all fail unless you can accurately predict when a drop will occur. Consequently you'd expect that even perfect short plays often fail.

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.

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.

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.

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

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?

This is rubbish. Foreign assets & factories are basically for manufacturing products for export, nationalise them and you no longer have any legal products to export, so you now have worthless exports and you lost the legitimate manufacturing & export you were doing.

That would be a worst case cause if now the world knows that their property isn't safe they'd move out of China then FDI plummets.

This is why many companies, like Apple, are moving (factories, equipment, supply chains, etc) out of China. Then what?

Hi China, good luck buying oil without any Dollars.

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.

Iran will take food and hard goods instead of dollars.

My God.

He talks about wiping out cities, and he's worried about balance sheets. I understand the context around it, but damn. That's cold.

Sometimes I am left in awe at the level of of mental overloading human beings are capable of that leads to statements like that.

OR, you get a default on that debt (esp. considering the entity is insolvent).

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?

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?"

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.

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

No. The US can't do that. And the US is bigger than China.

No one is so big that they can remit their debts and still get low interest loans.

Of course China could raise their taxes to pay for their spending, or they could keep printing money and devalue their currency.

But no one can not pay debt and keep getting low interest rate loans.

I think they can when the vast majority of the debt (nearly all of it) is locally owned and denominated in their own currency. What stops them simply saying "all this debt we owe to ourselves is cancelled"?

Vast inflation, being label a currency manipulator, tariffs, and basically stealing most of chinas household income and giving it to corporate would leave a sour taste in their citizen's mouth causing unrest.

The same thing that stops the Federal Reserve from doing that. You can't get something from nothing.

If the market has priced in that $30T is on reserve, and you just say, lol nvm -- you get incredibly fast inflation. The market reacts to that $30T not being priced in anymore.

The Fed, the ECB and Japans central bank managed to "lol nvm" trillions dollar, euro, etc into the economy without impacting inflation at all. If there was such an easy quick fix for inflation then those institutions would come knocking at your door and beg you to help them.

Which market?

The only thing that's directly attackable by the market is the chinese cny peg/trading range and china controls the convertibility of the currency, they can perfectly legally stop their own citizens from taking money out of the country while protecting their peg with their USD reserves.

Their bonds aren't in foreign hands, so there's nothing liquid to panic sell or short, there's nothing for the markets to directly apply pressure with.

If the currency doesn't fall I don't see where this inflation comes from, cancelling debt essentially owed to a state owned bank just re-starts the credit cycle.

That's a default and plenty of countries have done it in the past, but at ruinous cost. For debts in domestic currency they can just print the money, at the cost of severe inflation. For foreign debts they basically have to pay ruinous interest rates on any future borrowing and face the possible freezing and appropriation of foreign assets. Bear in mind they need dollars to do things like buying oil and food.

They can't cancel external debt. But they can restructure debt between State-Owned-Enterprises (SOEs) and state banks.

No they'd have to explain that more to it's people bcause they'd basically be taking most Chinese citizen money by printing more rmb. This would cause mass inflation, poorer consumer, social unrest because product prices would skyrocket overnight, and a lower standard of living.

They don't have to explain anything to the people. Don't forget who the people of China are dealing with. If they get too far out of line tanks will literally roll down city streets.

These aren't the same chinese they are dealing with. This generation has money and could easily leave. Those chinese now run the CCP

Why China's Bonds Are Defaulting at a Record Pace


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. :-)


And what is the point you're trying to make? China is more than half a day ahead of the US in terms of timezones, meaning that daytime news editors will have gone home by the time the day - and the stream of news - in China begins.

At least, that's one explanation; on the other hand I'm sure e.g. Bloomberg's news stream is a 24/7 thing.

What are you implying?

There's nothing inherently wrong with Chinese people, or others posting about China.

If you're talking about the timing, its probably because the US has been asleep whilst all the news has been happening, and now all the journalists are posting their stories, and people are reading stories and posting them here.

I'm just noticing that news about current heated debates about China are being posted around 9:00 East Coast time without implying anything

Define "early in the morning". If you mean USA morning, it's probably because there are people in China posting about this. If you mean China morning, it's probably because there are people in the USA posting about it.

This is an international site...

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