As a lay person, it has been extremely difficult to figure out what is going on. I have a weak grasp on four points(with low confidence on any of them being completely accurate):
1. There is an excess supply of apartments including the ones that have already been sold. The demand side is mostly people buying second and third units as investments.
2. China is going through a weird demographic situation. The younger generations are significantly fewer in number, they will need fewer apartments to live in.
3. Chinese provincial governments raise money by developing land and continue to be incentivized to build/approve/encourage a lot of apartment units.
4. All of this is funded with mortgages.
Thing is, all four of these can not possibly be right. It’s a little too insane. Whoever is on the other side of all those mortgages should have abandoned ship a long time ago otherwise.
What am I missing?
Who is holding all that mortgage debt? Who is continuing to issue more of that debt? When do the number of people selling their investment properties exceed the number of younger generations looking to buy their first primary residence?
These questions indicate a misunderstanding of how markets inside China work. I suggest you don't look at "what makes sense" but more look at the reality of what's happening.
What you are also missing is that sometimes, parties are not allowed to abandon ship. Couples who have bought homes with mortgages but are not moved in for years are not allowed to give up, they are not allowed to stop paying on threat of imprisonment.
The organizations on the countersign are also not allowed to give up on mortgages because the existence of their company is at the will of the government.
There was an uprising where people banded together and just stopped paying their mortgages and basically threatened the local police to mass arrest them, and that's one of the things that spurred the greater bankruptcy, because the government didn't really want to arrest all the people, cause that would indicate they are not in control. And seeming to be in control is what the government will opt for every single time in every single decision they make.
> And seeming to be in control is what the government will opt for every single time in every single decision they make.
That reminds me of when the Battlefield 4 game was banned in China, because one of the antagonists was a rogue Chinese general.
I remember thinking that the game would have had better odds if the plot had been about a unified and monolithic Chinese government doing willful evil instead.
An autocratic government running a fiat currency economy is a dangerous thing. On the one hand they can engineer the economy quite deeply. On the other hand, the imbalances are hidden and thus likely to be worse then they would ever be in a liberal democracy. But China has many centuries of track record running a command economy.
of course, but the central government is all about seeming to be in control, not objectively in control.
mass arrest -> leads to questions about why 1000's of young couples are being arrested due to them not wanting to pay mortgages on houses they can't move into for years, and has no construction progress (the construction is abandoned), and this is a contagion that will lead to another city starting to rebel, leading to more mass arrests. Not talking about 1 or 2 people, but thousands.
vs.
the central government is taking care of the people by forcing a company into bankruptcy so they can't take advantage of people anymore.
The 2nd is the better narrative. That's what they picked. Doesn't make sense, but is what happened.
I know that this comment will seem as pro china, but really your comment is really weird and almost funny. The way you portray the two perspectives sounds like a good Chinese government action being spun like a bad thing because actually "China bad".
1.) "The demand side is mostly people buying second and third units as investments." that is incorrect. Most purchases are first purchases from couples that want to get married, and a home purchase is a required dowry from men that they need in order to get approved for marriage from the parents.
There are famous online videos from newlyweds that purchased a condo from a few years ago, and have been documenting their journey, and they still haven't received the unit. Meanwhile their kid was born already.
3.) Nope. China’s government land sales revenue declined for the 19th consecutive month in July. Land sales fell 10.1% from a year earlier in July, after declining 24.3% the previous month https://www.reuters.com/article/china-economy-landsales/chin...
Note that recent low birthrate i.e. (2) does not immediately map to shrinking real estate demands: young people born 20-30 years ago are still moving to cities, looking for a job, and a place to sleep in, hopefully with not-too-long commutes. There will still be a bunch of young couples trying to get a home and being ruined by unfinished construction like you've mentioned.
Young people in Shanghai, Beijing, Shenzhen, and Xiamen/Amoy haven't had the means for a flat since... at least 6 years ago, when the per-square-meter price broke CNY 50 K. It's been understood as "maybe my parents have some savings from the 拆迁 demolition money for the down payment" sort of deal since then.
Smaller cities are more possible though.
* * *
Tangential: a good part of everyone's income in those big cities goes into rent and mortage, from the average worker to the restaurants and shops downstairs. It's always been screwed.
> Thing is, all four of these can not possibly be right. It’s a little too insane. Whoever is on the other side of all those mortgages should have abandoned ship a long time ago otherwise.
Why can't all 4 of these be right? "A little too insane" defines every bubble in hindsight.
Point to a bubble w/ a collapse and I'll give you a set of statements that are "a little too insane" such that fundamentals don't hold up.
My guess is you're gobsmacked by the idea that the fundamentals don't hold up and are saying "how can anyone be that stupid?". They didn't in 99, nor 08, nor Gamestop, nor now.
Everything can be wrapped under Greed.
[Edit] Full disclosure, I'm no better - I've lost money chasing greed.
GameStop? that wasn't a bubble, everyone buying it knew fully well that there are no fundamentals and that they are buying it to cause a short squeeze on hedge funds who shorted too much stock. Some of them got huge gains, others kept chasing the trade after it was over.
But it definitely wasn't a bubble. It was a good trade and there were some FOMO losers who kept chasing it more than they should.
I think it's too simplistic to blame it on greed. It's other things like, "I can't get married if I don't have a home to my name", or, "we want to have an investment to take care of ourselves in old age and there is literally nothing else we can out our money into"
On the policy side, it's very much "property taxes are the only way local government can secure revenue and so we must do whatever we can to keep the bubble inflated"
Sorry, with greed i was referring to those who sell the houses.
In 08, greed was the real estate agents and loan officers who gave loans to people who should never have had them when it was clear they couldn't afford it long run.
The home buyers many times just wanted a house but also wanted "more home" to maximize and was able to obtain a larger loan because the greed went all the way down.
Google "Andrew Left citron research evergrande". He explained it all in 2012, was banned from Hong Kong trading for 5 years as a result, just when Evergrande finally grew its ponzi scheme too big.
Long story short: the head of Evergrande was politically connected, helped build China on borrowed money, had no credible plan to ever repay all these loans, one day China decided to stop leveraging and Evergrande had to unwind... except it couldn't because it didn't have enough actual money to repay loans quickly. Too bad their bonds were sold to everyone and their grandmothers in China to try to find yields in the no-interest environment. Now that interest rates are back, nobody want junk Evergrande bonds anyway. Catch-22.
> 2. China is going through a weird demographic situation. The younger generations are significantly fewer in number, they will need fewer apartments to live in.
That's not really the issue. I doubt the younger generation can afford it. The problem is where the wealth is going - as in those with the $$$.
> The demand side is mostly people buying second and third units as investments.
No, at least not always. At some point you weren't allowed to buy more than 1 or even use your funds openly this way.
So to wrap up - those with wealth lost or have lost trust with China / the government and are withdrawing at alarming rates, e.g. to overseas. Due to how COVID was handled and many other cases where your wealth could just disappear - people now rather keep their $$$ elsewhere - not back "home".
Due to capital controls, most regular Chinese who lack CCP connections can't legally keep their savings "elsewhere". Speculative investments in residential real estate have been the only game in town.
you don't need CCP connections to buy BTC under the table, or to buy houses in Canada.
BTC valuations and fluctuations in price can be pegged to Xi's anti-corruption initiatives. Ditto for MBS taking over in Saudi. Lotta people were moving lots of money to other places and then GTFO.
that may not help rando middle class earner in China in 2023 -- CCP is a little tigher these days... -- but realistically they don't have the need or ability to store stuff elsewhere regardless. 5k for a retirement fund isn't getting stored in a Bermuda bank, even if they could.
I think the demographics aren't in a "weird situation" ... they have significant population decline. Baby boomers is a generation across the planet with varying years in each region or country and generations behind them are smaller everywhere. China also had a 1 child policy for a long time so this has resulted in fewer people. Fewer people (smaller generation) having fewer people results in fewer people, which ... you get it. You can't create more 30-40 year olds right now. Massive real estate growth doesn't correlate with the population. Either people or companies are going to get stuck with the costs, I doubt the government is going to prop up the company.
China’s one child policy is actually even more dramatic because before that, Mao was telling everyone to have more kids, and it worked a little too well.
The problem started long time ago when the central government took most of the tax revenue from the local provincial and city governments leaving them without funding to operate. As a compensation, they were granted the authority to sell the land use right of their lands. Land is never privately owned in China. What is sold is the right to use the land for a period of time.
Since the state owned all the lands and the local governments as the sole supplier of lands, they became a monopoly in land sale. As with any monopoly especially a unchecked one they pushed to raise prices all the times to gain maximum profit. The regulation and policies of the governments aimed to build more and to keep raising the property price years after years because that's what brought in the money.
It has become unsustainable as people couldn't afford the high price. There're a glut of houses and sales have been slow yet the governments have prohibited the lowering of the price as lower housing price means lower tax revenue. There're some cases when developers lowered the price and got hit with huge fine and jailed.
High price and slow sales mean the developers like Evergrande cannot get rid of the inventory to get the capital back to fund further development. They have already sold the not-yet-built houses for the next phase but have run out of money. Couple years back the central government had forced the banks to put in severe limits on loans to the developers. They turned to shadow banks like investment fund trusts to raise money but those are blowing up just now, defaulting on bond payments. They have no money to finish the projects. They owe huge amount of debts, owe huge amount of unpaid taxes, and owe the unbuilt houses to customers. They should have been bankrupted a long time ago but the governments won't let them.
This is a huge problem for China. Housing development comprises about 25%~30% of GDP; its blowup would cripple the economy. Most ordinary people's wealth are largely tied to the value of their homes; a large drop of the house value hits most people hard, forcing them to cut back on spending, further putting down the economy. The financial institutes like banks, shadow banks, investment funds, etc have lost huge amount of money as developers unable to pay back their loans and people defaulting on their mortgages. The lowering of the property value would force more loans gone underwater. There'll be a string of bankruptcy. The local governments have large revenue shortfall and yet saddled with huge debts, because guess what, they were in the game to invest to build housing. The shortfall forces them to lay off workers, cut back on salaries, cut pensions, and cut back on services. Even the central government has no money. Last year they openly said that beyond some emergency fund there's no money left.
Any option for solutions is a bitter pill and no one has the political will to do it. It's just a downward spiral.
The end game is a political crisis. Chinese peopple tolerated the semi-dictatorship of the CCP while the economy appeared to be booming. If the economy collapses there's going to be a very unpleasant - likely violent - crisis of legitimacy.
It's one reason China is pushing a BRICs currency. If China can print its way out of this disaster there's some hope of mitigation - messy, but not fatal.
If that doesn't happen there's a good chance of a financial and political implosion, with possible Western contagion.
China is not pushing a new BRICS currency. They want the BRICS and others to use their existing currency, the yuan, for international trade. Of course this is never going to happen beyond token amounts, especially not in India.
Lula, leader of Brazil (ie, the "B" in BRICS) is calling for a common currency.
"I am in favor of creating, within the BRICS, a trading currency between our countries, just like the Europeans created the euro"
This does not sound like just using the Yuan, and is more likely to gain support of the bloc. I'm pretty sure Lula and Modi do not want to trade one devil (US) for another (China).
"The financial institutes like banks, shadow banks, investment funds, etc have lost huge amount of money"
My understanding of the core problem is - Money has to come from somewhere. It is the result of China becoming world's workshop. Chinese have 45%+ saving rate and those powered up the FIs' balance sheets. This money funded all the buying of land rights, development of housing etc. How Chinese govt. deals with these toxic balance sheets before Chinese people decide to make a run for the banks, that will determine how this crisis unfolds. Ultimately there never is free lunch, unless you are the US which can print it's way out of any problem it creates for itself - what times!
(be aware - the comment is by some anonymous guy on the Internets. Its most value maybe as a 'mildly entertaining conjecture'.
Ha. You’re asking for a research paper. Which areas you want citation? You can certainly google on the areas that you're interested. I’ll see what I can do later today when I got the time.
If you want a research paper, can you do a book report on every single one of the references?
To be frank, it’s a huge entitled ask. If it's one or two specific points being unclear and you want reference, fine. Not cool for asking references for the whole thing. What have you done to educate yourself in these areas besides asking strangers in the internet to do the work for you?
I assume you were talking about their 3.2T foreign exchange reserve. A large portion of that is foreign direct investment money from outside which needs to be paid back when moved out. China has up to 2.7T foreign debt as of last year, which needs to be paid back in foreign currencies. There're a fair amount of currency needs for facilitating import and export. There's not much left in the pool.
> The younger generations are significantly fewer in number, they will need fewer apartments to live in.
Not necessarily, living space per person could increase faster.
> all funded through mortgages
All promised future work is debt by definiton. with real estate being 70% if Chinese wealth, it has to be public debt, whether in the form of mortgages or government debt.
As an aside, but related to this topic, I can't wrap my head around on how one can purchase an apartment. My house's warranty deed explicitly defines the property I own, with references to plat maps that have very specific survey measurements, etc.
But if I buy a slice of a high rise building, what does the deed say? What does the plat map look like? Do I just own an N% slice of the underlying land? Do I own specifically the portion of the building that is M inches from the top of the foundation to M + Q inches above it, and X inches from the Northwest corner of the structure, etc?
For rentals, it's straightforward, since the owner pre-specifies the dimensions of the unit numbers. But how does one "own" a section of a multi-tenant structure? How does one insure just their unit, if fire and other damage risk is shared?
Have you considered what ownership in a company looks like? Even your plat map of the land, how much of the land do you own? Can you dig it looking for things? Can you regrade it?
And the very specific survey measurements are going to be based on landmarks that were likely planted for the purpose of making the survey work. Heaven help you if you have seismic activity move anything around.
That is, all of this only works because we define it to do so. You can do the same with a high rise. Condos are very common and have well defined common areas and housing spaces. Things get more complicated when you consider time share ownership.
In China the state owns all the land so this is less of a concern I guess. In the US there's usually some sort of HOA that you get a vote in that owns the land.
I've always wondered the same, and understood it as "owning the airspace" within the specific unit, but not having any ownership of a physical structure. No control over the maintenance of the building would be a concern -- seems very an extreme version of "neighborhood deterioration" could easily occur.
I know plenty of people in the US who own condos (usually part of a pair e.g. 1A/1B), but outside of major cities the idea of owning an "apartment" (a unit in a huge building full of hundreds of other units) is somewhat foreign. However, my relatives in eastern Europe own these types of apartments as their primary investment vehicle due to poorly performing native currency / stocks.
----
via ChatGPT:
"The ownership of an apartment or condominium within a multi-unit building is indeed different from owning a single-family home. Here's how it typically works:
### Deed and Plat Map
1. *Deed*: The deed for a condominium or apartment within a high-rise will usually refer to a "unit" as defined in a "master deed" or "declaration" that has been recorded for the condominium. It will contain a description of the unit and any associated "common elements" that you may have an ownership interest in (e.g., shared hallways, gardens, and sometimes amenities like a gym or pool).
2. *Plat Map*: This would typically include a map of the entire complex, including the boundaries and location of each individual unit, along with common areas. These maps are often extremely detailed and have to be filed with a local government office.
### Ownership Structure
1. *Air Space*: In essence, you own the "air space" confined by the boundary walls of your unit, sometimes specified down to the paint on the walls. The structural elements, building exterior, and common areas are usually considered "common elements" owned collectively by all unit owners.
2. *Percentage Ownership*: Yes, you often own a percentage of the common elements, including the land upon which the building is constructed. This is sometimes proportional to the size of your unit as a percentage of the total building or complex size.
### Insurance and Liability
1. *Individual Insurance*: You would typically have a specialized form of homeowner's insurance known as an HO-6 policy that covers the internal elements of your unit (fixtures, improvements, personal property, etc.) and may provide liability coverage for incidents within your unit.
2. *Master Insurance*: The homeowners' association (HOA) will generally have a "master" insurance policy covering damage to the common elements and the overall structure. This is funded by HOA fees collected from the unit owners.
3. *Shared Risk*: The risk is essentially communal, but individual unit owners are usually responsible for the deductible on the master policy for damages originating in their units. Some complex scenarios could involve subrogation between the individual and master policies.
Understanding your specific rights and responsibilities when purchasing a unit in a multi-unit structure is crucial, and legal counsel is usually advised to navigate the complexities. Always read the declaration, by-laws, and any rules and regulations to understand your ownership fully."
Aside from 2) Is it not basically the same as the US mortgage crisis, except a bigger magnitude? That it could get worse shouldn't be surprising since China doesn't exactly promote liquidity of information.
Evergrande sells apartments before they are built to fund construction, and the purchasers pay mortgages during the build. If the company has insufficient funds to complete ongoing construction, which gets delayed, purchasers stop paying their mortgages and the company goes into a death spiral. Meanwhile purchasers get shafted, buildings stand uncompleted, and construction workers and materials suppliers see demand collapse.
Note this isn't merely a Chinese thing. A variation of this is in fact the default way new units get build and sold in the Netherlands, for example.
Personal anecdote. I had a mortgage for 2 full years before being able to move in to my apartment because I bought it before a single stone was laid. The way this works here is that the money is held into an escrow account for most of time, with the construction company only receiving payments in installments (e.g. 'roof finished'). Lastly, the final 5% of the purchase amount is held back until 3 months after the unit is finished, which can be extended if large defects are found. Bankruptcy risk was covered with an insurance, which was a condition to the mortgage.
I would have to assume the company didn't use those payments to fund the building of properties for earlier mortgages. The Ponzi scheme nature of it is the Chinese thing (not that it has anything to do with being Chinese, it's just the reality of Chinese real estate today and of the past decades). Paying for the construction of a new home in installments is something done across the world.
If previous poster's description is correct, they would have to, right? Or have a revolving fund of debt which is the same thing with extra steps. Builder doesn't get paid until after building things, the construction has to be paid for somehow.
I guess the money being in escrow puts the risk on the builder instead of the buyer.
You can do something similar in India as well. The benefit is that you get the flat at cheaper rate, at the risk of losing all your investment. There have been many cases of the developer going bankrupt, but nothing at the scale of evergrande.
guarantees you a spot of your choosing in a building of your choosing, which might be in demand in big cities -- there is only so much space in big, tight, well-established cities.
anecdotally, we were looking at houses to buy and many of the nice, well-priced ones, had multiple bids and even price increases (e.g. throw another $10k on it). not quite a full-on bidding war, but it became clear that if you want in you get in early, and pay for the privilege's.
This creates a situation where developer and homeowner interests aren’t aligned. Once the developer receives the money, they are not incentivized to deliver the house on time or do quality construction.
The other model, where investors fund development before the house is sold, aligns both parties. The developer/investor wants to produce a good product so that it will sell at a high price and the buyer has the chance to inspect the property before purchasing.
>The developer/investor wants to produce a good product so that it will sell at a high price and the buyer has the chance to inspect the property before purchasing
That should be a solution. But not usually that simple, sadly
The developer/investor wants to produce a product that LOOKS good so that it will sell at a high price. Read the other comments about quality
And, those investors often sell the property before it is finished or before it’s even started. So you have the same problem, with a longer chain of middlemen
There's some truth to this, but the appearance of quality is far more important in the latter scenario than actual quality. The average buyer isn't a housing inspector. They may have googled some stuff beforehand, but that's not saying much. It's another incarnation of the "informed consumer" farce.
TLDR: there's a huge regulatory crisis going on in both the US and China markets (again). Now the failure of 1 large entity can crash entire empire(s).
Basically the same corruption that societies have been battling ever since societies existed.
What's the worst that can happen? It's all just numbers on papers or memory. When Evergrande folds, others will pick up the opportunity.
Why should the government and the non-investors pay for government agencies that enforce regulations? If investors cannot handle due diligence, let them pay private agencies to secure their investments.
> In general, economic crisis, unemployment rate and other macroeconomic measures are associated with increased risk of suicidal behavior at the aggregated level.
Worst that can happen? If banks have used peoples' savings to purchase Evergrande debt or anything related then the banks may not get repaid which would result in the banks losing peoples' money leading to people spending less money resulting in a recession or depression.
Instead of default the bad debt and a recession, what alternative is there? Prop it up a little longer? Default on everything, go to CBDC, and issue everyone monthly CBDC tokens to buy food?
If China descends into chaos, it could be alot worse than the Great depression, since so much of the world depends on China, and since they have a crazy arsenal of weapons.
Yes, the nazis were a fringe political part polling below 3% before 1929. The Weimar republic was relatively stable and it seemed that the biggest economical issues were already behind..
It's a bit more complicated than that even if they have delivered all the houses. If they owe other companies huge amounts of money that they issued through debt bonds (and sold internationally), then it can affect companies and banks that are not related.
Their physically ability to deliver homes is not what's at stake here.
It's not a problem in itself, but a sign of the destress the company is in. Evergrande has huge debts and is struggling to pay suppliers. It has started (or received payments for) hundreds of thousands of units that could be abandoned if the company goes bust (many already are), leaving many people with nothing but mortgages for property that doesn't exist.
These probably aren’t the homes Evergrande has sold, mostly in south China. Ordos Kangbashi will never be populated because coal is on the way new out, a true ghost city that is only categorized as a success via goal post moving and lots of demolition (Ordos itself isn’t a ghost town, just this new district).
The article talks about buildings in kunming being demolished. While kunming definitely went through a big bubble, I would hardly call it a ghost town now.
Evergrand and other I-companies all tried to become "everything" companies.. They invested heavily into other parts of the Chinese economy. Like ecars, manufacturing etc. and these parts are now going bankrupt too. I guess the ccp has about one or two years left, it will not weather this storm. To many life savings, dreams and futures get crushed right now. One can not eat bitter forever.
Philosophically the problem is always about how to distribute wealth instead of how much wealth we have. I'm not saying the problem of China. I mean the problem of humankind.
Practically, just like any other real estate developer, they have tons of unfinished projects and now we don't know the future of them. And of course it's just one of the problems.
The problem is you assume they're legit. Who says they actually completed the projects (houses)? Who says there are no defects and that people can live in them? How do you even come to that conclusion? Just assume in good faith?
Imagine solving the affordable housing problem, but by doing so you create a nation scale ponzi scheme with trillions of dollars on the line because it also simultaneously made up the majority of your country's economic activity for 2 decades. That's what China is in the pickle with.
It's great they have all this housing, except there's both nobody to live in them (they were investment homes) and there's all this debt tied up in even completing the ones that were ponzied out.
They basically took the US 2008 Mortgage fiancnial crisis and said, WE CAN MAKE IT BIGGER, BY A LOT.
There are a number, and I mean a large number of issues. I'll just pick a few
1.) as of 2021, There are nearly 800 unfinished Evergrande projects in more than 200 cities across China. https://www.nytimes.com/2021/09/28/business/china-evergrande.... Even if the buildings were unfinished, the buyer still had to keep paying the mortgage!! and if they didn't, and the courts foreclosed the property and sold it, the buyer is liable for the fees and the differences. Most of the time the buyer is hugely underwater since the real estate price in 2023 has crashed 50% - 70% from peak. And now, because your social credit is shot, you no longer can purchase tickets for flight or train, making it even harder to try to find jobs to pay back your debt.
2.) China is known for its tofu dreg buildings. Just google online if you want to see brand new condos with facades blown off, cracked foundation, sand mixture where cement should be, tilted buildings, etc. This is especially true with buildings built in the last few years. And this is especially true for buildings from bankrupt mega developers like evergrande and country garden.
3.) This is a domino that leads to a series of systemic collapse. Country garden, the second largest developer in China, missed bond payments as small as 22 million recently. It had a capitalization of 60B in 2018. Now it has a debt of 200B. Zhongzhi enterprise missed payments recently, being one of the largest trust company. People are reminded of Lehman from these events. https://www.businessinsider.com/china-economy-beijing-lehman.... Doesn't help that export and import just collapsed by double digits in July, exports to US dropped 23% y/y, there's huge youth unemployment of at least 22%, foreign investment dropped 90% in 2023, and the worst flood in the last 50 years just hit China's biggest grain region.
Oh yeah, and because Chinese citizens are outraged by Fukushima release, they are boycotting Japanese seafood, and in general all seafood, which has decimated the entire seafood industry in China overnight, with no traffic to seafood market or restaurants.
4.) Even if the buildings were done, a lot of the buildings are empty and not livable due to shoddy finish, foreclosures, no public amenities working, lack of residents (owners are selling the units at 50% price cuts), etc. Imagine living in a huge 50 story building with only a few residents at night. https://www.architecturaldigest.com/story/see-inside-a-ghost...
> yeah, and because Chinese citizens are outraged by Fukushima release, they are boycotting Japanese seafood, and in general all seafood, which has decimated the entire seafood industry in China overnight, with no traffic to seafood market or restaurants.
This one is hilarious. China imports very little seafood from Japan, and they just single handedly tanked their domestic seafood industry for a few bananas worth of radiation.
Yeah many of these apartment buildings are so bad no one can move into them. They're often demolished a few years later. Construction standards just don't exist in China, and people are forced to continue paying mortgages on these properties under threat of prison. Given this extraordinary position of power and laissez-faire, the major construction companies have been way over-leveraging. Most analysts are confused as to why it has taken so long for the industry to collapse. The prevailing sentiment is that the government keeps stepping in every time another company is ready to fall. Eventually the government will just own all the construction companies directly, and the CCP has a poor investment and management track record.
Having read the article but not heard of Evergrande prior to this, what are the implications of this outside of China? The article mentions that the company filed for bankruptcy in the US, but not what US operations/developments they had.
They have $340bn of debt; even if they default on the whole amount, it's only 10% of China currency reserves.
The problem, however, is not the nominal amount but how the company network is inter-connected with other companies (either abroad or locally). This amount, albeit not colossal (by China relative size) could trigger effects in other companies that will lead to their failure. This will go on until it becomes a full international crisis.
Of course, it could mean that just some rich intercontinental people have lost money on some Chinese developer bond. The thing is, no one knows. Not the leaders of the CCP nor the US do have insights whether this can go somewhere to just stop here.
> 340bn is the official account. the true number is unknown.
China is very good at controlling the real numbers that come out. Something like Evergrande failing can't be hidden, and could be the tip of the iceberg of much bigger issues coming to light.
E.g. if there were a global registry of credit dependencies and ownership, at least for system relevant companies, we should know what is going to happen.
But what is the worst that could happen? If companies fold, ownership will be transferred. As long as the companies are profitable, their business will continue.
If the assets are worth 10 but the debt is 100, creditors will not have anything of value transferred, and will have to write down a loss.
This could be a small impact or a big one.
If you are a person who was relying on those assets for income for your retirement this might mean you no longer have enough to live by. If you are a company you might in turn be forced to fold. If you're a stablecoin that bought evergrande bonds you might be forced to show you have no baking of your emissions..
That will mean companies won't have any privacy at all (all info will need to be public) and essentially centralize them into a single "massive" world company. It didn't work back then (it's similar to communism in that sense) and I don't think it'll work now (it's every bureaucrat wet dream).
How does public knowledge centralize the control of the companies? Owners would still be in control and there still would be laws prohibiting collusion between companies.
This will cause Australia's first recession in over thirty years. Chinese steel is made from Australian iron ore, which is Australia's biggest export.
At the start of the Global Financial Crisis, the Chinese government stimulated the domestic housing market, which was the start of this bubble, but the demand for steel was enough to ensure that Australia suffered no economic downturn at all.
Value of iron and coal for Australian exports in 2021 was even higher than in 2019. Iron at $118B, coal at $54.3B, or $172.3B/343B (50.2%). That’s definitely going to hurt.
If only hedge funds. Big pension funds, universities etc are throwing millions (billions?) of private/taxpayer money into China in recent years. A housing market collapse would not be good news for any of them...
Those were financial operations. They were selling bonds outside China.
The treatment of stakeholders have also been different inside and outside of China. The assumption based on the experience so far is that inevitably overseas investors, such as US based entities, will lose out more.
Chinese firms have been raising money in overseas markets and has been exporting risk in this way, the issue is how China's government will handle this against the opaque corporate structure behind these financial instruments sold overseas.
In theory, being a socialist utopia, everyone should just get their house because of market failure which is outside of their control. (which is kind of what I think should have happened during the GFC, bank failure in your favour so to speak)
But lets see how the utopia holds up to reality. Yay, we're living in interesting times.
For many of those owners the house is not intended to be lived in but rather an investment vehicle. Somewhere i read that a majority of home owning families (sometimes extended families) in China have more than one home -- don't know if that's true.
In the city I'm aspiring to buy a house (a.k.a. somewhere near Tokyo), you only need to put the down payment if the construction hasn't finished yet. There will be no mortgage until after the house is ready.
I kind of think this may be a slightly better model in terms of homebuyer protection... (May not sound good for the developer though)
When a flat I‘ve bought in Germany was constructed, the payment to the developer happened „Zug-um-Zug“, that is, they received a total of like 7 payments as the development reached certain milestones.
Had to take the whole mortgage up front in one go, though.
In the USA, you obtain short term high interest financing until the home is completed, then you spin that into a mortgage. Most people buy almost completed new homes from developers, however, which means the developer takes that initial loan/risk.
Could someone key me in to this? I thought generally the Chinese government never shied away from stepping in and manipulating things. Recent trends (for example, the government blaming young people themselves for their low employment numbers) feels like they imported the bootstraps mindset from American politicians, which seems out of step with what was seen as them being rather direct in control of their economy. Recent actions from the government seem to be opposite this.
A lot of what counts as government spending is actually the central government telling provinces and cities to spend. Except those also have heavy debt burdens after years of stimulus.
Very little central government money is trickling down. And the problem is not just that the developers are out of money, but their contractors have not been paid for months, those contractors have not paid their suppliers or workers for months, and down the line.
Chinese control of their economy isn't about altruistically helping everyone. A cynical perspective is that this is just more class conflict born from an Animal Farm style revolution.
They seem to be aware of the dangers of perverse market incentives and they also know the real estate market is completely shot. Propping up Evergrande doesn't fix the underlying issues while letting it fail would not just wipe out the wealthy, it would have severe negative impact on the middle class and everybody working in construction.
People here are all "let it fail" and don't seem to care about how many millions of people would be drastically affected. These are people's lives we're talking about. Stop waving it away as if it doesn't matter. The callousness here is appalling.
Also, don't look at what some politician says, regardless of country. What's important is what they do about perceived issues.
No, investors cannot just write it off as a total loss.
Hard as it may be, it will be better to just burn an entire generation rather than draw the final curtain on the People’s Republic of China and possibly the world economy as we know it.
Meh. I understand property is pretty much the only viable investment a person can make in China, but these investors should have known what they were buying. Makes me think of idiots that lost big in crypto. The bubbles value has already been spent, so someone is going to have to bag hold. Either the government should buy and forgive all the debt, or the investors should get fucked for overplaying their cards. Maybe they can fake their death or escape to another country.
The issue is that the bubble should’ve popped probably even five or ten years ago, but then the government allowed credit extension and the bubble kept on.
The recent hard lines, with no sign of easing after multiple defaults, is a new thing.
TBF arguably RE bubble was being addressed 5-10 years ago, there was domestic construction slump in 2012-2017 - where indicators like floor space completion and construction employment peaked. Then 2017 crack down on shadow banking which drove developers + local gov to increase presales, turning it into a financial instrument to keep the taps going. Then hard 3RL in 2020. Could have probably smashed skulls sooner and harder though.
With how big the bubble has gotten a painful explosion was going to be inevitable no matter what.
Markets considered expensive in the West have significantly lower house price to income ratios. In San Francisco it is 12.3x, in London it is 13.9x, in Paris it is 18.8x, and in Shenzhen it is a whopping 40x.
If they stop paying the mortgage, the bank can foreclose on their non-built house. Frankly speaking, the government is probably going to bail all of these people out; if they don’t the whole real estate sector could fall over. The practice of selling houses yet built is not limited to Evergrande.
In most countries, you aren’t able to even get a mortgage on a house the bank can’t put a lien on. The banks are actually complicit here, but they are mostly state owned, so the government will manage fall out here in the direction away from social unrest.
Why isn’t it down 100%? According to the article, they’re in bankruptcy with way more liabilities than assets. Presumably the shareholders are getting wiped out.
Bed Bath and Beyond and Sears helped me realize that the cold eyes sanity of investors is often overstated. These were both bankrupt companies who developed stockholders with cultish beliefs around the company's ongoing viability.
With Evergrande, I imagine some people believe it might be important enough for China that it may someday get a bailout. I don't believe it.
I agree with you, but it might not be completely irrational to buy an about to be bankrupt company. If the assets on book is sufficiently larger than the stock price, investors might get a payout when it gets sold off after fees. When Enron was liquidated, the last investors that bought the stock ended with an 8x RoI (according to an Acquired episode). Still an insane gamble obviously.
Short sellers can use bankruptcy as a way of closing out their positions and also in the process provide some market and liquidity. Short sellers borrowed stock and sold it based on the belief that the stock was going to drop in price and need to buy the stock to return it.
Institutional investors will attempt to liquidate but are largely locked in as significant sales will take the price to zero. It is the irrational retail investors who see the stock trading above zero and believe that “smart money” is accumulating shares.
Agreed about irrational retail investors keeping the price of Bed Bath and Beyond and Sears above $0.
Hilariously, the creditors/BBY management saw the price and sold stock into that crowd right before bankruptcy. The prospectus literally said something like "we plan to go into bankruptcy soon and this stock will be worthless, it's just providing slightly more value for our creditors" but meme stock traders bought it anyway.
Same reason company executives and employees still collect a paycheck. Shareholders have the power to appoint new company executives which has some value.
Shareholders have no priority and the only hope for shareholders to recover anything would be through government intervention (e.g. American International Group). The value in Evergrande was entirely in its financial engineering capabilities and not in its construction expertise. The loss of confidence means that the financial side of the business has zero value now and nobody would be give them new money today even if excess liabilities magically disappeared and the construction side is severely impaired as there is little demand for new apartments.
As I understand from this "The Plain Bagel" video [0], they're not bankrupt. Instead, they're likely nearing the completion of their debt restructuring.
The problem is the term "bankruptcy". Colloquially people seem to think a company is just out of money. All you need to file for bankruptcy is to be unable to service debts at a specific time. It might even just be a transitory state.
A company is insolvent when liabilities exceed assets. Companies can remain insolvent indefinitely unless they miss a payment at which point a creditor can force them into bankruptcy where a court oversees liquidation.
Evergrande is insolvent and is now bankrupt. There is no reasonable scenario here where the company continues to operate as a growing concern.
The US didn't have anything to do with evergrande afaik, and paying for property before it's built is a bad idea. But China can still try to deal with this by blaming the US for all ills and pushing for war with Taiwan to distract everyone - that works almost every time!
I don't know that it's happening now, I was making a suggestion that it could happen. If you're having economic troubles in a country, especially in an authoritarian country, blaming the outside world for your troubles can be a smart thing. No one can really argue with you in a dictatorship - if anyone is powerful enough to contest with you, you just kick them out of the ruling party, just like what actually happened in China with Xi removing Hu Jintao in a very public way at the party Congress. Another example is Russia threatening to invade the smaller countries around them if they make treaties with Western countries, and then invading them for being "bad" like in Ukraine, Georgia, Moldova, etc.
It "could" happen. On the other hand, it could also not happen. This is pure speculation on your part. Whatever happened to looking at evidence? This isn't the first time China has had economic trouble.
The thing that makes it much more likely than could is it is the official goal of the communist party to unify with Taiwan, and they say they will do it by force if necessary. That makes it a matter of time, waiting for some weakness in Taiwan or the lack of will in the countries supporting them.
If a much more powerful country says that they will take you over by force if you don't surrender, that's a pretty concerning position to be in.
China's goal of unifying with Taiwan also existed the last few times they had economic troubles. Did they went to war with Taiwan do deflect economic trouble back then?
They did not of course. China looks to be playing the long game to me. But China's economic issues are the most severe since they began their incredible time of growth and productivity increases. Best in the world ever as far as I know. But now they have terrible unemployment, so bad they stopped reported stats on that and some other areas, plus the shrinking population long term.
I think up until now, for the last 30 years (?) they were on the upswing and they looked better and better. Now they are strong, but having serious economic challenges, more than past few years. The unneeded infrastructure will start to matter more. I really hope they can keep it together and not start a war. But it's such an incredible temptation for countries in this position. They are close to their maximum power, in 10 years I expect the worker shortage to really start to hurt.
Economic troubles in the late 80s were much more severe than today. You need to look at how things are on the ground instead of sensational western media reports. They've preached a permanent collapse of China every single year for the past 20 years. Go back 10 years and it's the same doom and gloom in the media, you just weren't as flooded by those reports as today.
If anything causes a war with Taiwan, it's all this talk about how they are going to start a war with Taiwan and subsequently sending military support to Taiwan "to defend them". China can accept (and has accepted, for decades) the status quo but not deviations from it. Taiwanese polls say that stunts like Pelosi's visit made the situation more dangerous. This is literally a self-fulfilling prophecy here. Wise leaders from the past came up with the One China Principle as a way to keep the peace, which it has for decades, but the US is rapidly breaking that construct while gaslighting the other party.
I know china was desperately poor in the past, I've heard of people starving. My western media sources also predicted china was ascendant in the world every year for the past 10 years. Like the nyt or the economist. Now they are looking at demographic collapse, economic struggles in China, I'm not sure where it will go in the short term. I'm sure china will figure it out over time.
I'm not sympathetic to this view that by saying the west cares about Taiwan's independence, we are going to cause China to attack Taiwan, since we talk about how China & Taiwan should be free and we'll push too much on the feelings of China or something. That's ridiculous. China keeps threatening to attack Taiwan, I'm not responsible for their actions. I can only help Taiwan, as an american and a believer in the freedom of democracies. China will attack Taiwan or subvert their democracy slowly or just accept them, but I will support the us defending Taiwan's democracy. I know many people from Taiwan, and from China too through work. They are all just people. They should be free to self determine their future and live in peace, all of them.
It's similar to Russia telling former ussr countries they can't make treaties with NATO or they will attack them, then they go and attack the ones that don't make friends with nato. I just can't accept that type of hysterical behavior. I respect the achievements of china, but they don't have the right to invade people because their feelings are threatened or something. The same is true of the us. The us is not a perfect country of course. But I'm generally in favor of democracies being able to survive.
China is not a democracy and is against the democracy of Taiwan surviving. Yeah, I knows there is a complex history about taiwan the island, and the kmt treated the natives in taiwan terribly, and there was the war for China in the 1950s that the kmt lost and chinese communists won and taiwan wasn't a democracy at the start, until recently. Still I want the democracy of taiwan to persist. I don't care about the historical arguments about one china. Let that democratic country survive. I hope one day mainland China becomes free and the people have self-determination. I've known people who escaped the soviet union and married people in my family even back into the 1980s. It can happen again hopefully the people of China can become free and self-determine their own choices about their lives.
Western media has also predicted that China would be crushing everything in the west for the last 10-20 years, from manufacturing to software engineering to military technology. I work as a software engineer, I've worked with people educated in china for 30 years now. They are smart, as brilliant and capable as anyone I meet. I don't underestimate their capabilities.
The treatment of stakeholders have been different inside and outside of China. The assumption based on the experience so far is that inevitably overseas investors, such as US based entities, will lose out more.
Chinese firms have been raising money in overseas markets and has been exporting risk in this way, the issue is how China's government will handle this against the opaque corporate structure behind these financial instruments sold overseas.
A truly developing nation can't, the economic powerhouse of the 21st century has a lot more latitude in this respect. As long as not every single investment in it goes tits up, there won't be any shortage of dumb FOMO money chasing growth.
(Look at the mountains of money piled into straight-up obvious crypto scams, at least China is full of real companies that are doing real business[1], even if sometimes that business goes to shit.)
[1] Like making all the things the world uses. And serving half a billion people living middle-class lifestyles.
There's a lot of corporate scams in China that gets swept under the rug. That's not a validation of China's model of growth, it just postpones the pain, like Japan's lost decade. And Japan was a lot more developed when its real estate bubble popped.
China has experienced the catch-up growth that it missed out on after 1949 in the past 3 decades or so. The trajectory of growth is less than for example, South Korea or Japan. The big difference being that China has more people.
The evergrande situation has nothing to do with the US or the trade war or the political tensions between PRC and the USA, it has more to do with the internal economic situation of China really.
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1. There is an excess supply of apartments including the ones that have already been sold. The demand side is mostly people buying second and third units as investments.
2. China is going through a weird demographic situation. The younger generations are significantly fewer in number, they will need fewer apartments to live in.
3. Chinese provincial governments raise money by developing land and continue to be incentivized to build/approve/encourage a lot of apartment units.
4. All of this is funded with mortgages.
Thing is, all four of these can not possibly be right. It’s a little too insane. Whoever is on the other side of all those mortgages should have abandoned ship a long time ago otherwise.
What am I missing?
Who is holding all that mortgage debt? Who is continuing to issue more of that debt? When do the number of people selling their investment properties exceed the number of younger generations looking to buy their first primary residence?