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Evergrande: This will get out of hand and we'll be lucky to live through it


Parliament
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They're a big Chinese real estate developer whose chickens are coming home to roost.  The Chinese real estate bubble, 15 years in the making, might be about to pop.

In a stock filing this month, Evergrande said flat-out that "there is no guarantee that the Group will be able to meet its financial obligations."

So far, Evergrande's efforts to offload office buildings and attract new investors haven't helped, and the company has hired a team of outside advisers.

But a big question is how the Chinese government will intervene, if at all. China has been growing increasingly concerned about debt levels in the country, especially in its overheated property sector.

https://www.npr.org/2021/09/20/1038944385/china-evergrande-wall-street-stocks-selloff

https://www.foxbusiness.com/markets/beijing-unlikely-to-save-evergrande-report-says

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This is just one of many that are severely over leveraged and have been dipping in the shadow credit market in China. Without the massive annual GDP growth, many of these firms are going to find it hard to keep the charade going. This has happened to several midtier banking institutions in China the last 2 years as well, but COVID has obscured it from being a big global warning sign.

If Evergrande completely imploads how much of the banking and real estate market does it take with it? Are we going to see a massive cascade effect or will we see the Chinese government step in to try to limit the damage.

Normally the government would step in and help mitigate the fallout, but with COVID and all the issues tied to it, I am not sure if they just go ahead and let it burn and think that now might be time to go ahead and let the bubble pop and then roll in more systematic changes as a COVID recovery response. 

Never let a good crisis go to waste...

 

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Looks like Bloomberg and WSJ are having a source off. Bloomberg says the Chinese government is signally they want to keep them from imploading and WSJ is saying they have already missed some payrolls and the Chinese government is expecting them to crash and are working on containment strategies.

 

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22 minutes ago, Knoxtnhorn said:

Right.  But how is a company focused on real estate going to get above water when there's already plenty of inventory?  They keep building, but the need is not there.

Lots of the phantom or ghost cities that sprung up were part of the push to maintain the Chinese GDP growth mirage through state financed infrastructure programs.

The thing is that many of those empty apartments are in areas that don’t have a real need for housing because they aren’t where the population explosion is happening. So yeah their is a glut of apartments, but it is a lot more nuanced than that.

There are entire “ghost” cities built that people never moved to and so they remain vacant and keep getting rolled into this “empty apartment” number.

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12 hours ago, Knoxtnhorn said:

Right.  But how is a company focused on real estate going to get above water when there's already plenty of inventory?  They keep building, but the need is not there.

The need is for Beijing to look like a shiny beacon when in reality it’s a slimy pork rib bone turd from your standard non pure bred dog.   

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11 hours ago, Laxtonto said:

Lots of the phantom or ghost cities that sprung up were part of the push to maintain the Chinese GDP growth mirage through state financed infrastructure programs.

The thing is that many of those empty apartments are in areas that don’t have a real need for housing because they aren’t where the population explosion is happening. So yeah their is a glut of apartments, but it is a lot more nuanced than that.

There are entire “ghost” cities built that people never moved to and so they remain vacant and keep getting rolled into this “empty apartment” number.

I mean, if no one moved to them, they’re fucking empty.  

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On 9/23/2021 at 1:27 PM, NeverMarryAStripper said:

Homeless problem solved

This is a fantastic idea.  We can fly them all over there first class and still be saving money once Adler's hotel grift stops.

Not a real strong chance any of 'em can ever afford to fly back to Austin.  

"You'll be taken care of there. Nice apartment.  Good food."

"Can I take my dog?"

"I don't think that's a good idea." 

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On 9/24/2021 at 3:52 PM, Lobo said:

This is a fantastic idea.  We can fly them all over there first class and still be saving money once Adler's hotel grift stops.

Not a real strong chance any of 'em can ever afford to fly back to Austin.  

"You'll be taken care of there. Nice apartment.  Good food."

"Can I take my dog?"

"I don't think that's a good idea." 

They'll provide immediate employment as well.  Camp-like feel  

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On 9/24/2021 at 3:52 PM, Lobo said:

This is a fantastic idea.  We can fly them all over there first class and still be saving money once Adler's hotel grift stops.

Not a real strong chance any of 'em can ever afford to fly back to Austin.  

"You'll be taken care of there. Nice apartment.  Good food."

"Can I take my dog?"

"I don't think that's a good idea." 

I think this with a combination of a Squid Game tournament could turn this whole thing around.

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Residential property taxes in China are zero. It makes it really easy for people to buy and hold real estate, even if it’s producing no income. Say what you want about property taxes in the USA, but at least they are a nudge toward keeping property productive, and a disincentive to build unneeded buildings. That being said, a zero property tax rate is a sure fire way to stimulate construction industry jobs.

Bernard

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10 minutes ago, elfenix said:

might have sold some assets to make some(?) of its bond payment due today:

 

https://www.reuters.com/world/china/investors-brace-rough-ride-evergrande-faces-payment-deadline-2021-09-28/

The buyers are all heavily state controlled companies. These are all “assets” that Evergrande tried to sell of several times and no one was willing to purchase and now  all of the sudden they are getting acquired at their asking price.

Still won’t be enough to solve their issues, but it might be enough to lessen the blow to those within China that we’re looking to get squeezed, but still not really taking care of the international  investors.

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19 hours ago, Bernard said:

Residential property taxes in China are zero. It makes it really easy for people to buy and hold real estate, even if it’s producing no income. Say what you want about property taxes in the USA, but at least they are a nudge toward keeping property productive, and a disincentive to build unneeded buildings. That being said, a zero property tax rate is a sure fire way to stimulate construction industry jobs.

Bernard

It's also a way to overinflate your GDP by 10-15% for a decade or more  

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My understanding is all the residential property in China is developed on a ground lease because the govt owns all the land. And they ultimately own all the banks as well. So China is basically printing money through real estate development. We do it by using the Fed to buy bonds.

Obviously interesting to see how all this plays out.

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Ohhh look, Taiwan is now concerned that China will invade.

When there is internal concerns that the current political class can’t control that may devolve into a climate of social unrest as the society looks to new leadership, the drums wars begin to beat louder.

A playbook as old as history itself..

 

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1 hour ago, tbone_ said:

If China invades Taiwan it will be to get TSMC, which the rest of the developed world will not be able to allow.

The invasion of Taiwan would cripple most of the globe from a electronics manufacturing standpoint. With the dependency the rest of the globe has on their chip manufacturing I am not sure what will happen.
 

This, not the Trump- China trade is the most likely thing to literally kick off a legitimate global shooting war.  It’s one of the potential nightmare timelines that exist right now

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didnt realize that taiwan was now responsible for 63% of global semiconductor manufacturing. Most of that is TSMC, who I guess possesses like 84% of manufacturing capacity  below 10 nm ... scary shit (samsung has another 14%). Is Intel the only US chip company even trying to manufacture at these geometries? I dont pay as much attention to this shit as I used to before I left the industry years ago.

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Last I heard, the Williamson County bid for the $17B Samsung fab was still on track. I don't think it's official, but I know a guy that just signed on with Samsung here in Austin, and presumably it's to get that project up and running. At least that's what he was hinting at. 

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We are going to see a major global shift in who buys what chip tech where and an added importance of providing a closed loop infrastructure if and when the US begins to reshore most of all chip fab. 
 
I hate to say it but if/when that happens I am not sure how “important” Taiwan is then treated in the global landscape. It would then move more into a regional escalation issue, as long the the chip design and fabrication  aspects are kept out of Chinese hands.

I would probably be willing to bet that whenever a potential invasion of Taiwan would take place all chip fab locations will become smoldering piles of rubble first and foremost and then the real “fighting” would occur.
 

Bigger question would be who does it? The US, Japan, Israel, or someone else.

 

This is a timeline I would not want to live through, because regardless of what happens Taiwan is done, the global tech supply chain would collapse and I doubt the rest of the world would allow the chip manufacturing to be captured intact.
 

That would then imply all of that death or destruction for nothing, with the reduction in chip fab production leading to a global depression and more than likely food shortages as well. 

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10 hours ago, Parliament said:

But China KNOWS that doing anything that impedes the manufacture and export of those chips would bring the navy of every free nation of the World to their doorstep, right?  And they know they can't beat us all.  Right?  

Not sure.  I would hope so, but rational decisions and the desire to maintain power have never been two concepts that go together for long. At what point is a war better than a regime change?
 

Right now domestically with China we are seeing lots of cracks in the Xi regime. Xi is “supposed” (anyone is believing that, I have a bridge to sell you..) to step down soon and it seems that his faction is doing all that they can to consolidate power.
 

It can be argued that the entire lack of bailout Evergrande is as much about trying to deal with the housing bubble and the massively over leveraged mess it has become as it is to cripple one of the Xi competitors major financial backers.

If they are willing to integrate those types of issues into their internal politics, would they also not be willing to interject that self serving nature into their international agenda?

I doubt that it would get to the point an invasion occurs, but I wouldn’t be shocked to see that saber rattling become worse. Part of the issue is that they may be boxing themselves in and making it hard to be able to back down of this keep going forward. My greatest fear is that they reach the point where the political machine can’t be stopped, even though common sense shows that it is a global disaster to all parties to keep moving forward.

 

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The End of a ‘Gilded Age’: China Is Bringing Business to Heel
Executives sit in jail, tech companies are being reined in and the biggest developer is teetering. It’s the beginning of a new era for China’s economy.

Chinese tech companies are reeling from regulation. Nervous creditors are hoping for a bailout for China’s largest developer. Growing numbers of executives are going to jail. An entire industry is shutting down.

For China’s leader, Xi Jinping, it’s all part of the plan.

Under Mr. Xi, China is reshaping how business works and limiting executives’ power. Long in coming, but rapid in execution, the policies are driven by a desire for state control and self-reliance as well as concerns about debt, inequality and influence by foreign countries, including the United States.

Emboldened by swelling nationalism and his success with Covid-19, Mr. Xi is remaking China’s business world in his own image. Above all else, that means control. Where once executives had a green light to grow at any cost, officials now want to dictate which industries boom, which ones bust and how it happens. And the changes offer a glimpse of Mr. Xi’s vision for managing the economy, ahead of a political meeting expected to solidify his plans for an unprecedented third term in charge.

The goal is to fix structural problems, like excess debt and inequality, and generate more balanced growth. Taken together, the measures mark the end of a Gilded Age for private business that made China into a manufacturing powerhouse and a nexus of innovation. Economists warn that authoritarian governments have a shaky record with this type of transformation, though they acknowledge that few have brought such resources and planning to the effort.

Spoiler

In one week alone last month, creditors fretted about the fate of China’s largest developer, Evergrande, with no word from officials about a bailout; the central bank announced that all transactions involving unapproved cryptocurrencies would be illegal; and the authorities detained the top two executives at HNA Group, an indebted logistics and transportation conglomerate, and sentenced the chairman of Kweichow Moutai Group, a high-end liquor company, to life in prison for taking bribes.

At China’s annual World Internet Conference last week, an official signaled that efforts to rein in internet giants were not over, warning against the “disorderly expansion of capital.” Once a showcase for the might of China’s entrepreneurs, this year’s conference became a platform for pledging fealty to state efforts to spread the wealth.

Lei Jun, the founder of the smartphone maker Xiaomi, said big internet companies should help smaller ones. Alibaba’s chief executive, Daniel Zhang, hailed his firm’s new $15.5 billion plan to help small business and underdeveloped regions, invoking the aphorism “If you teach a man to fish you feed him for a lifetime.”

“The very definition of what development means in China is changing,” said Yuen Yuen Ang, a political science professor at the University of Michigan. “In the past decades, the model was straightforward: It was one that prioritized the speed of growth over all other matters.”

“It is clear by now that Mr. Xi wants to end the Gilded Age and move toward a Chinese version of the Progressive Era, with growth that is more equitable and less corrupt,” she added.

Shockwaves have been felt across China’s economy, the world’s second largest. Analysts argue that some measures, such as reducing debt and curbing anticompetitive behavior among internet platforms, have long been needed. But they worry that the new policies could hurt competitiveness and favor the inefficient, monopoly-dominated state sector, which Beijing has long avoided reforming.

Natasha Kassam, a director at the Lowy Institute, an Australian think tank, said private-sector dynamism could suffer. She likened the shifts to Mr. Xi’s anticorruption campaign at the start of his tenure nine years ago, which curbed rampant graft but also consolidated power.

“During the anticorruption drive, no one knew who might be targeted next,” Ms. Kassam said. “What it led to was inertia. Officials were too terrified to make decisions in case they were the wrong ones; you’ll see a similar chilling effect on the private sector.”

For many businesses, the guidelines were once clear: Pay lip service to the government, make money and go global if possible, with foreign listings and acquisitions. While China’s billionaires always felt vulnerable — the country’s list of richest individuals is often joked about as a catalog of targets — they also had a cozy relationship with officials that allowed for flouting the rules and influencing policy.

Success is no longer a guarantee of safety. The big-name casualties are piling up, and there is little sign that Mr. Xi and the regulators he has empowered are daunted by the carnage. Since February, investors have erased more than $1 trillion from the market value of China’s largest listed tech firms.

The knock-on effects are also hitting regular Chinese people, with the potential to stir social unrest. Officials have issued directives urging local governments and companies to look out for budding protests related to the troubled property sector. Evergrande’s crisis has triggered anger among unpaid suppliers, home buyers who purchased apartments years in advance and employees, some of whom have demonstrated at its offices.

Beijing is trying to send a warning that no firm is too big to fail. Mr. Xi’s corruption campaign and an ensuing push to curb excess borrowing have already made a big difference, said Dinny McMahon, an analyst for Trivium, an advisory focused on China.

“These days, the behavior of financial sector executives is more conservative,” he said. “It’s not about looking to what you can get away with anymore, but trying to adhere with the spirit of what Beijing wants.”

Mr. Xi appears to be imposing the same discipline on the tech sector. Last year, regulators scuppered the blockbuster listing of Alibaba’s sister company Ant Financial. When Didi Chuxing — the ride-hailing company that bought Uber in China — went ahead with an initial public offering in the United States despite reservations from Chinese regulators, its software was pulled from app stores in China.

Tech firms are also learning to relinquish control. Most companies now have Communist Party cells, which can dictate decision making. Investment firms run by China’s cyberspace regulator have taken small stakes in TikTok’s parent company, ByteDance, and the social-media firm Weibo in the past two years.

New signals that companies should focus on “common prosperity” — a government initiative to lessen the wealth gap — have led to a parade of giving from tech giants and their leaders. Tencent and Alibaba, China’s two most dominant internet firms, both have made multibillion-dollar pledges to help train small businesses and revitalize villages.

As it has become riskier to be a star, some of China’s leading entrepreneurial talents have shunned the spotlight. After the deaths of two employees, Colin Huang, the 41-year old founder of Pinduoduo, an e-commerce platform, stepped down in March to make way for a new generation. In May, the 38-year old founder of ByteDance said he would resign as chief executive.

In the eyes of Beijing, all tech is no longer equal.

Companies focused on the consumer internet have lost the protections they once enjoyed. Instead, the government is focused on a push for national self-reliance, countenancing big bets on bleeding-edge technology, partly in response to United States policies that cut off access to key components like microchips. Officials have heavily subsidized manufacturers of semiconductors, commercial aircraft, electric cars and other products.

Huawei, a company closely tied to the government that makes critical telecommunications infrastructure equipment, has mostly sidestepped the crackdown. After its founder’s daughter Meng Wanzhou, was released from detention in Canada late last month, state media trumpeted her return to China. Though Ms. Meng is the picture of inherited privilege in an unequal society — she is known for wearing luxury brands and spent her detention in a Vancouver mansion — her homecoming was portrayed as a national triumph.

“It was a stark reminder that they are not like you. There are hierarchies in Chinese society, and different treatment comes with it,” Ms. Kassam said. She added that Huawei had long had special status as a favorite of the government.

“Still, part of me wonders for how long. I might have said the same thing about Jack Ma not too long ago,” she said, referring to the founder of Alibaba.

 

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7 minutes ago, Laxtonto said:

Not sure.  I would hope so, but rational decisions and the desire to maintain power have never been two concepts that go together for long. At what point is a war better than a regime change?
 

Right now domestically with China we are seeing lots of cracks in the Xi regime. Xi is “supposed” (anyone is believing that, I have a bridge to sell you..) to step down soon and it seems that his faction is doing all that they can to consolidate power.
 

It can be argued that the entire lack of bailout Evergrande is as much about trying to deal with the housing bubble and the massively over leveraged mess it has become as it is to cripple one of the Xi competitors major financial backers.

If they are willing to integrate those types of issues into their internal politics, would they also not be willing to interject that self serving nature into their international agenda?

I doubt that it would get to the point an invasion occurs, but I wouldn’t be shocked to see that saber rattling become worse. Part of the issue is that they may be boxing themselves in and making it hard to be able to back down of this keep going forward. My greatest fear is that they reach the point where the political machine can’t be stopped, even though common sense shows that it is a global disaster to all parties to keep moving forward.

 

The article I just posted points to what I think you're talking about: Xi & company consolidating their political grip on China's "private" sector with a view to keeping the masses happy. I'd guess a lot of this is a response to an expected slowdown in economic growth and in anticipation of demographic headwinds.

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2 hours ago, bolverk said:

The article I just posted points to what I think you're talking about: Xi & company consolidating their political grip on China's "private" sector with a view to keeping the masses happy. I'd guess a lot of this is a response to an expected slowdown in economic growth and in anticipation of demographic headwinds.

This sentence is the real money shot

Quote

Where once executives had a green light to grow at any cost, officials now want to dictate which industries boom, which ones bust and how it happens

Surprise surprise, these industries and even individual companies that are allowed to boom or bust, seem to correlate very highly with who has ties of allegiance with Xi's faction.

I would probably focus more heavily on what direction they keep their boom and bust targets to than anything else. Notice they even mention here about heavily subsidizing the chip fab and architecture sectors within China. If they continue to put pressure on Taiwan it signals to me that they have come the realization that they will not be able to catch up in space and are worried that the US and her allies will continue the moves to freeze them out.

The common view of state for technology advancement has been to acquire it through any means necessary, and if it looks like they cannot acquire it through research or IP theft, maybe the best way to do it is through conquest.

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  • 2 months later...

Looks like Evergrande is going to officially default and next on deck is Kaisa (which has a huge set of international paper as well).

 

Still seeing the pattern that the Chinese government is most likely letting the foreign bond holders get boned and doing what they can to protect the domestic investors.

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  • 2 weeks later...

Not related to Evergrande, but this thread seems as good a thread as any for this

Quote

A Chinese property developer that was once one of the country's largest says it has lost contact with a wealth manager that it gave $313 million. It's just the latest blow to China's embattled real estate sector.

China Fortune Land Development said in a stock exchange filing on Thursday that it entrusted the money to China Create Capital, a company registered in the British Virgin Islands, to invest in fixed-income financial products. It said it expected an annual return of 7% to 10% on its investment.

The Chinese developer says now, though, that it hasn't been able to contact China Create Capital.

Fortune Land said that it doesn't yet know how the missing funds will affect its profits. It added that it will "actively cooperate" with a Chinese police investigation "to protect the company and shareholders' interests."

Lulz. "Whattya need, 10%? Yeah, we can get ya 10% returns, just uh..... hurry up and wire that $300 million on over."

Edited by Blotto
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  • 6 months later...

Just FYI, but there are multiple rumored reports of massive bank runs happening in Henan, Shanghai, and Dandong, China the last 10 days or so.

What makes this a bit scary is Henan is one of the major ag hubs in China and if we see bank runs and potential bank defaults there then it directly leads to lack of cash to pay for the Henan rice harvest (which is generally in mid-summer) going to the market.  If no cash is on hand to pay for the crops or more importantly pay to harvest the crops, we are going to see even more of a strain on the internal food prices in China, which tend to see even more panic bank runs as people pull out cash to try and hoard staples.

It isn't a major "oh shit" moment yet because this is most likely isolated to some regional banks and the reports are not widespread, but most of the regional banks that crash are those so heavily leveraged in the Chinese real estate market that without a major bailout will collapse. This once again can easily end up with another cascade effect if we see another wave of real estate defaults.

Everyone sort of forgot about the Chinese real estate market steadily degrading due to the COVID lock downs earlier this year, but is just one more scary data point that the banking and real estate sector over there is still in serious trouble and a global downturn will make it even more volatile.

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