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China’s dodgy-debt double act (economist.com)
52 points by dmagee 8 days ago | hide | past | favorite | 57 comments

Chinese citizen living in US, posting anonymously for obvious reason.

Huarong and evergrande are just the tip of the iceberg. If you wish to know what all the things fester below for CCP, here's a very timely summary video from laowhy86, one of the YouTube expert on China https://www.youtube.com/watch?v=RpwtZLzDM_o

Unfortunately you will not find many outspoken Chinese native citizen on YouTube, for they all fear CCP retribution, even living abroad.

恒大暴雷 市值两万亿的中国第一房企 居然对付不出400亿 如同一个万元户 被400块给逼死了 房企都要塌了 房价还没跌 建筑商的商票拖欠 银行的债务拖欠 私人借贷也拖欠 房子卖出去还收的是全款 不知道这些钱都到哪去了 魔幻的时代 魔幻的故事啊

> one of the YouTube expert on China

Hmmmmmmm. His videos are flashy, watchable... and incredibly poorly researched.

I am incredibly unimpressed by his "I Found The Source of the Coronavirus" video. And frankly it calls into question all his other videos.


Having watched that video, laowhy presents a biased view on the topic. Not a biased view of China mind you, but because his views echo the triumphant 90s zeitgest that capitalism, liberalism, and what can be cast as a "laissez-faire" attitude (supposedly being necessary to the development of a country) is for him the de-facto aka obvious best system. The underlying thread is still that "Fukuyama take" that capitalism and liberalism are the end-of-history.

Laowhy provides a compelling narrative, but it also feels like it is just that: a narrative.

China as a country has endured and has at hand many more tools to ensure its stability. It is not a simple dictature or the USSR, which could be brought to its knees via a mix of political and economic ostracism.

The video sadly feels like some feel-good geopolitical video for westerners: "don't worry about China because China worries about itself and hides it, badly".

Are there any specific points in the video you disagree with?

Just saying something is biased does not make you correct. It is just very elaborate way to say “oh no it isn’t!”.

The other answer to your message offers the gist of my point.

Laowhy does not offer the research that backs his point besides the general doxa around China. I don't see why I should have to prove a negative.

China has many issues, but the feel-good doomsday rhetoric offered by Laowhy does not help OP's argument especially when channels like Polymatter have covered those issues, better, with less bias and more down-to-earth conclusions.

Laowhy only offers this slimey smug clickbait view of China that is exactly what American powers want people to believe. He is constantly releasing videos saying "China will fall any day now!", it is just giving people what they want to hear and it's totally reasonable for this person to point out how biased and uncritical he is.

I wouldn't call a foreigner a China expert. I wouldn't be a China expert as Chinese, and I can read Chinese.

And, it is not abnormal at all that big company defaults on tens of billion debts. Without digging deep into the issue, I think the company is playing a too-big-to-fail game with the government, by bundling itself with many small investors, it will have more leverage with the government since the government is cracking down on big real estate companies. This is actually not the first time the company use this strategy. The interesting thing now is that is the government going to allow bankruptcy to happen or not.

EDIT: especially the foreigner lives in China spending time with his expats friends, no knowledge of the society, no knowledge of the business at all.. I just started reading Red Roulette, you will know, even you are Chinese, if you are not in the business circle, you don't know business..

Perspectives :

"The level of debt is jaw-dropping. The private non-financial sector owed the equivalent of 222% of GDP at the end of 2020. Most of that sits with companies. By comparison, private non-financial debt in America is 164% of GDP."

GDP per capita China :


   2010  4550 USD (current)
   2020 10500 USD (current)
USA GDP per capita


   2010 48466 USD (current)
   2020 63543 USD (current)

> "The level of debt is jaw-dropping. The private non-financial sector owed the equivalent of 222% of GDP at the end of 2020. Most of that sits with companies. By comparison, private non-financial debt in America is 164% of GDP."

So they have about a third more debt than we do? "Jaw-dropping" seems like an overstatement.

The US Dollar is the primary currency in which trade is conducted in much of the world. The US banking and financial system has much of the most powerful entities in the world relying on it for their future financial gains.

China, by comparison is a relatively more fragile economy with much of the growth there coming from manufacturing and real estate , both of which are sectors that are starting to struggle because, either there's pressure to move manufacturing away from external forces or internal force in China are clamping down on real estate speculation to free up the capital allocation crisis there where people would rather put their money on brick and concrete rather than back scientific innovation or commercial enterprise.

In short, the US can print $4-$5 Trillion dollars and get away with it while China simply does not enjoy the same luxury.

China has currently 3.2 trillions USD worth of foreign currency reserves


(And 0.1 trillions in gold reserves FWIW.)

Another perspective - central bank lending rates:

   China: 3.875%
   ECB and FED: about 0.25%

I think you are implying that China has room to drop rates to stimulate the economy, but the rates you quote are nominal rather than real. I.e. they don’t subtract off inflation. China May be less capable of dropping rates without stoking greater inflation and massively upsetting social order.

I may be misinterpreting your point though.

Yes. And the rmb is rising relative the usd and euro. Point is they have plenty of space unlike the rest of us.

It seems like the Chinese authorities are trying to deleverage by explicit policy (very evident in the stock market), here when the leverage in the western economies is at its highest.

We in the west have a tendency to overestimate China's debt problems by comparing the numbers and ratios to that of the west. Forgetting that 1) China is very big and has a lot of people 2) most people in China are poor and live essentially in a third-world economy that can grow very fast by basic investment in infrastructure such as transportation, housing, energy, education.

They have been investing in infrastructure, housing and energy. The return on that investment has been decreasing. The CCP has been kicking the can down the road as best it can trying to maintain growth numbers, which in part acts as justification for its single party rule.

You (and most other western commentators) underestimate just how long the road is.

China is rapidly heading towards the middle-income trap. All of the positioning in the past decade is in the hope of avoiding it. This is a massive challenge as the prosperity of the upper classes is based on cheap labour. All of the advanced economies overcame this by moving jobs up the value chain. China can't easily to do this due to its massive population, a large part of not very well educated. There is a real risk of social instability when semi-skilled jobs dry up.

I 100% believe that the main reason a country stays stuck in the middle income trap is its capability to create high tech IP which the nation can use to suck up what I would a global rent for lending out its IP.

That why the patent system is so toxic for the global south its like cutting off the steps on the value chain stair.

10 years ago people were also chatting about China being caught in the middle income trap because China was unable to create its own global brands and original products, and was destined to be a cheap factory for western brands forever, never would be rich enough to have an internal market.

Today we have global brands like Xiaomi, Huawei, Tiktok in every corner of the planet.

And there is just going to be more of it.

Middle income trap doesn't have much to do with global brands. It has to do with whether there is enough capacity to absorb excess labour when economic growth necessitates transition away from agriculture and manufacturing to service and information industries.

Export driven growth is also very risky as geopolitical issues (as we can see now with Huawei) can happen on a dime. In order to develop China up to western standards, the world needs to supply resources for a population well over all the western countries (EU+US+CANZUK+Asian Tigers) combined. All of the countries that have achieved had good relationships with their importing trading partners, China on the other hand is moving in the opposite direction due to political reasons.

The point is it hasn’t happened and it doesn’t happen. Employment is high, internal consumption is growing, companies climb up the value chain etc.

Instead predicting that it is going to end abruptly tomorrow, the intellectual powers of commentators would be better spent on explaining why it continues and why it has continued for so long.

> The point is it hasn’t happened and it doesn’t happen. Employment is high, internal consumption is growing, companies climb up the value chain etc.

All of which are beside the point. It is the type of jobs that are available and their relative value. Internal consumption needs to effect a shift in the economy towards services, which isn't happening. Off-shored high-tech manufacturing is moving away to more political acceptable countries.

>Instead predicting that it is going to end abruptly tomorrow, the intellectual powers of commentators would be better spent on explaining why it continues and why it has continued for so long.

Mainly because they created an unequal system with capital controls and ownership rules to siphon foreign capital and IP. This is supercharged by an hyper aggressive business environment and in general large appetite for risk, leading to sky-high asset prices, which is a concern for advanced economies, but much more of a concern for a developing one.

When I visited family in the Philippines every dam mall or street market I visited you saw Oppo, Vivo, Huawei and Apple stands. It was kind of a shock compared to here in western Europe.

And from what I can gather Chinese EV car brands are now just entering the European markets. The EV car market has pretty much has been a hard reset of the car industry where new players and old player need to duke it out. Its kind of exciting as someone with a Asian background to see so much happening in Asia to the point im planning on using the next 3~5 years to learn to read and listen to spoken Chinese. Just so I don't have to see it all through a western politically and racially biased lens.

What's important is high-value jobs. You need these to transition excess labour away from unskilled and semi-skilled jobs. The key is creating and sustaining these jobs.

Obviously tech is a part of this, but also financial services as well as resource/energy industries. IP is less of an issue than it first seems, it's the ability to execute in a market that is more important.

I never put a timeline on it.

This is what I have heard more from other China investing podcasts, that the next China is in rural China. Not ASEAN, not India but rural China will become the next China. Like you said most of them are probably just getting by. Moving them to the cities and make sure the next generation is educated will give China its next two decades of growth. From what I also gathered in land rural China grows at like 10% plus a year compared to single digit coastal regions.

Most of China's industry is already powered by rural China. Migrant workers (Mingong/民工) are the workforce manning the factories. They number roughly 300 million.

Is there any way to short evergrande, buy puts, etc.? I didn't find them listed in my brokerage.

Is smart money already doing so?

Any other dominos that will fall because of this, and similar plays to take advantage of them?

You are a bit late in the game. Their bonds are already trading at a 75% discount and the stock is down 80% this year.

As a general rule, you shouldn't trade on news like this, unless you understand really well the risks you are taking.

"Smart" money has been betting against Evergrande for years, and losing money on it until very recently. I heard of one asset manager who in hindsight was totally correct about the fundamentals give up trading them at all, they so consistently lost so much money on it (the market can stay irrational etc.). It's a dangerous game!

Mike Bird at the WSJ has been going on about this for years as well.

Timinig issues aside. Typically you cannot short something like this directly. But you can do it indirectly by going after ie. suppliers. For example short the Aussie dollar.

Buy puts on any Chinese ETF?

This was covered on yesterday's Real Vision Daily Briefing[0]. It does feel like it could be China's Lehman moment. We'll have to wait and see.

There seem to be a lot of cracks and fraying in China's economy at the moment, and it feels like the sort of thing that could bring on a global economic crisis, if not handled with care.

[0] https://www.youtube.com/watch?v=_w8twoGZR_Q

We live in very exciting times. The question isn't "Is China's economy good?" or "Is China's economy bad?". The question is "How will it perform relative to Europe and America?".

The US's economic fundementals aren't great. I'm expecting to see US government spending be the majority of GDP in my lifetime. That sort of centralised planning doesn't bode well for the West.

So I thought "gov't spending, majority of GDP" was preposterous, but then I looked at the graph at https://en.wikipedia.org/wiki/Government_spending_in_the_Uni...

Looks like it already blipped the 50% mark in WW2 and is quite close now. Seems to (visually) be leveling though.

Very important question: are pensions counted as "spending" in the breakout of federal/local/state spending? Because if they are then the number will inevitably go up as life expectancy beyond pension age increases.

I'm slightly surprised to see that the War On Terror didn't register as a visible discontinuity on the graph, even as a smaller one compared to WW2. I suppose the money would have been spent on the military anyway.

What is preposterous about it? If anything we can probably guess that the 40s to 80s were so nice because government spending went up. The 2008 blip was just the bank bailout.

It looks like government spending has stabilized 40 years ago. Considering how much the economy got "worse" from the perspective of the average because China got more powerful since 2000 it's actually strange how the numbers remained stable.

What is preposterous about it?

You mean why I felt it was preposterous? Well allow me to demonstrate my naivety...

I would have expected 50% to be "socialist Europe" type spending, and indeed, a bit of googling reveals France is at about 60% of GDP right now, Germany at about 50%, Netherlands at 47%... That 60% of all income is determined by the policies and decision making of politicians, apparatchiks and bureaucrats is, I find, shockingly close to a planned economy.

So why preposterous? Because the US, on so many fronts, positions itself in contrast to Europe - free market ideology, small government rhetoric, fiscally conservative. Anyway, obviously, I was wrong.

It's pensions. On both sides of the Atlantic. https://www.usgovernmentspending.com/pensions_spending

The difference in military spending (which might otherwise be a likely suspect) is more like 3.5%ish (US) to 1-2%ish (Europe)

“ the US, on so many fronts, positions itself in contrast to Europe - free market ideology, small government rhetoric, fiscally conservative.”

No. Not the whole US. This idea is not in majority. Some people do think so, but they don’t get to control the whole country.

Economy can evolve, what we consider as fundamentals can change, people would think it is crazy to have a currency not backed up by gold previously has worked, it is time printing money becomes normal, it is just numbers anyway. Unless there is an alternative, the economy will go forward as it is. As long as everyone is buying into this game, the game can continue forever.

Why does every single conversation about China have to devolve into a contest with America? This is usually a way to distract from problems in China with whataboutisms. The soviets did this obsessively too the minute anyone critiqued them.

It is in fact possible to evaluate a countries economy in isolation as well as comparatively globally … and America (and the rare EU anecdote) is not the only economy to compare to.

America’s issues don’t alleviate other country’s issues. The Chinese economy, population, and political/legal system are often very different so direct comparisons are usually only partially valuable.

All ex-empires (Iran, Turkey, Great-Britain, France, Spain, China) when talking about a topic compare themselves with the current rooster on the heap.

Every time there’s a China article on HN at least half the comments are about America, or more. Why can’t we just talk about the issues China is having?

Wanting to compare them isn’t the problem here by itself. It’s how every conversation gets derailed with “but America does x”. They both have their own problems.

>Both episodes show that the hierarchy of creditors in China is based on politics and the priorities of the state

The 2008 financial crisis showed that the same is true of Western nations. US and European central banks absorbed trillions in bad debt, and a few banks that officials didn't like walked the plank while the majority came out ahead in the end. The same dynamic is of course 'bold decisive action' when free market capitalists do it, and 'dodgy' when "communists" are engaging in it, at least in the pages of The Economist.

Wondering if this and the everglade situation could be the undoing of tether. Tho Tether seems to be completely disconnected from any sort of reality.

Tether is speculated to be backed by a lot of Everglade ‘commercial paper’ debt.


I don't think so. I believe the majority of their commercial paper is in reality IOU to the affiliated exchanges - so money printed from thin air. But I do believe that Tether days are numbered - given the size they reached and the implausibility of the numbers they shared (only beacause they where forced too do so).


As fascinating as this would be the only connection the tweeter makes between the two is that Tether bought a lot of CP and Evergrande happens to need a lot of money. Tweeter needs to get off whatever he's smoking

It is unrelated. If Tether is to unravel it will happen as the broad cryptocurrency market falls and the outflows into USD becomes larger than the inflow into cryptocurrency (via Tether and other means).

The surreally large "shadow debt" that modern China has accumulated was my undergrad essay topic 10 years ago.

Since then, it seem to have grown from "surreally large" to "absurdreally large"

Go to any big Chinese city. Look around. Every skyscraper around is a mountain of secret debt few times its value.

China is really very close to Sri Lanka in how GDP numbers were financially engineered from massive, but well disguised debts on a nation-state scale

It is been very, very hard to take money out of China for a few months now. A sign of things soon to come, I believe.

So why were you wrong, 10 years ago, when you assumed that the debt burdens were unsustainable?

Parent didn't use the word unsustainable, merely "large". And remember "Market can remain irrational longer than you can remain solvent"? There's no particular reason why it should "correct" on any particular timescale. Kick the can hard enough and the problem is solved for your lifetime.

What baybal2 writes, he could have written 10 years ago, heck even 20 years ago. And it would a common view on the state of Chinese economy. Yet through this period China has grown 5-10% pa.

"A sign of things soon to come, I believe." it says.

Nah. The debt will be restructured in some backroom deal. Maybe the central bank lending rates will be lowered a bit. And in ten years the GDP per person in China will have doubled again and all those high rise buildings will be full with people.

These 10 years proved me wrong, and am not sharing much of the optimist opinion in other replies.

I envisioned a scenario of some "backroom deal" at a great public expense, and indeed something like that did happen.

It didn't work. Well in a sense, there were giant bailouts, but that only fired up the furnace, and even more "stealth debt" entered the economy.

China has a few thousands more of Evergrandes, and HNAs lined up.

I bet it will never be fixed within the lifetime of regime, even at the expense of its interest in self-preservation.

And it's because Evergrandes, and HNAs are largely CPC's own making — these companies are the biggest sources of income for local governments, and families of high rank communists: defraud lenders, buy overpriced land from local governments, and hide it super duper well, so your mountain of debt turns into asset, seemingly legitely enriching kids of party members on your board.

It's a very strange scheme of state authorised credit fraud on a nation scale.

I don't think what you are writing is incorrect. And you are certainly correct in that the capital controls are necessary otherwise all these "ill gotten gains" would flee the country.

However I think you underestimate how long time this can be kept up for. China still has many years of out-sized growth ahead of it, and that growth will paint over the bad debt.

It will end at one point, but not now.

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