Evergrande Faces Bankruptcy — 1.5M Could Lose Housing Down Payments
By - _Steve_Zissou_
I’m interested in seeing what this does to markets worldwide. Not just in banking and housing, but in how China’s internal finances effect it’s exports overall.
My understanding is that the entire world had lots of exposure to the United States debt in 08. China likes to play it’s banking (and everything) close to the chest. I don’t see US housing being directly effected.
In 08 the us printed money to give banks, firms tied up in investing with those banks laid off workers. If this happens in China, with China’s already magical thinking monetary policy, I could see things going a bit differently.
I also could easily see China allowing the bank to fail, allowing housing for the lower class to become affordable , or simply have The Party buy the foreclosures, let the residents live there with some adjustment to their loan, and unilaterally dissolve Evergrande
The problem is 75% of household wealth in China is tied up in housing. If prices crash essentially millions of Chinese could lose their life savings. Everyone "knows" is China housing is a very safe investment.
> I don’t see US housing being directly effected.
I wonder if it's going to cause even more of the wealthy Chinese to try to pour money into assets that are considered safe (aka Western property).
I kinda expect the opposite. Chinese real estate is about to be on a firesale. Wealthy Chinese should be buying in the Chinese market which means the demand pressure on the US market would ease up.
The primary reason Chinese buy in western markets is to get their money away from the CCP. Cheap housing in China doesn’t have the same purpose.
>or simply have The Party buy the foreclosures, let the residents live there with some adjustment to their loan, and unilaterally dissolve Evergrande
This would have been a better move for the US in 2008.
I agree. If you’ve ever seen The Florida Project There were so many useful houses that just went empty this used and fell apart well at the same time there was a good number of homeless
Maybe China will actually use hindsight and let it crash. I couldn't imagine the CCP of all things bailing out anyone at all. The right thing would be to let the housing bubble burst and correct the market.
The problem would not be contained to evergrande is the problem. It would infect not only property developers but it corollaries as well other property developers, banks, contractors, material suppliers etc. Letting them fall would also make people more nervous about putting money into china as well
Everything you wrote would be a good thing.
Right?! I’m glad he stopped, I almost finished
This is what happened in 2008 with Lehman, Merrill Lynch, and Bear Stearns. The consequences weren’t pretty, but seem to have already been forgotten.
Which consequences, exactly?
The bailout the US provided made the banks able to escape taking their losses or unwinding their positions. Which meant the property bubble popped right back up.
Which was great for old people - and part of the reason why young people right now can't afford houses or rent.
>The bailout the US provided made the banks able to escape taking their losses or unwinding their positions
Not really; QE provided the liquidity to allow the banks to unwind their positions. They took losses, but they were manageable.
>Which meant the property bubble popped right back up.
Home prices have risen sharply because developers have not been building enough houses to keep up with demand; demand has simply outstripped supply.
I don't disagree but this will affect people outside of China as well
Again, that's not a bad thing. We need to quit trying to thwart market mechanisms just because they're going to hurt people. Nothing but bad things occur when we do that.
I absolutely agree, we just might want to hold onto our butts
To be fair, we only thwart them when they're going to hurt rich people. The poor get to experience the full range capitalism pretty often.
>To be fair, we only thwart them when they're going to hurt rich people. The poor get to experience the ~~full range capitalism~~ **full range of cronyism** pretty often.
Fixed that for you
That’s… not true? What happened when we bailed out banks, automakers, etc in 2009? It stopped the recession from becoming so much worse and led to fairly fast recovery followed by 10 years of continuous economic growth.
The 2009 bailout led to 10 years of pathetically anemic growth while driving up moral hazard risks.
You mean normal growth? 2019-2021 has been abnormally exponential.
'Pathetically anemic' how? From 2010-2019, GDP looks to have improved as much or more rapidly than it has in any other 10 year period. Same with unemployment.
Also, you're going to have to be less vague about these "moral hazard risks".
Uh what? Please go look at GDP growth in the post-war period. The US' growth 2010-2019 never got above 2-3%. Wages remained stagnant.
\> Same with unemployment.
Labor participation went down, which is the only reason unemployment looked as rosy as it did.
As for moral hazards - the banks are bigger than ever, and they're playing "heads we win, tails the government pays" more than ever.
Ok fine. The graph I was looking at only went back to 1970. My point is still easily made I think.
Median household income was $49k in 2010, $68k in 2019. That’s something like a 20% increase after considering inflation.
And you think the banks wouldn’t be doing these same things if we’d just let the entire economy crumble in 2009? What sense does that make? It would just be different people doing exactly the same thing today.
I agree that bailing put the banks without stronger regulation was a mistake but taking not action ajd allowing the system to fail just leads to uncontrolled chaos politically and economically across the board
We wouldn't need the stronger regulation if it were clear to everyone that no one is going to bail them out of their stupid decisions. Bailing them out didn't avoid the uncontrolled chaos. It just put it off for a bit. The uncontrolled chaos is coming once the government can no longer kick the can down the road.
the main problem is giving investors information to differentiate between insolvent developers and developers with short term issues. much like the 2008 financial crisis, insolvent firms like Lehman Brothers and Bear Stearns scared everyone from the banking sector and put stable firms like Wells Fargo at risk
Wells Fargo was knee deep in bad housing debt - and has had multiple scandals since, any of which should have dissolved it in a sane world.
Robosigning was bad enough, but they were literally caught stealing from millions of customers and are still around.
Wells Fargo has certainly had its fair share of issues but it had enough capital to save Wachovia while withstanding a severe drop in housing prices in 2008.
The rhetoric around letting our financial system collapse in order to extract Old Testament justice is short sighted. In a financial crisis there are no good options, only less bad ones.
China already doesn't want foreign money, most of the investment into China is inside, they either don't want US Capital or are just actively scrubbing it out because if that was an issue, this bubble would be a lot bigger, but it wouldn't be China only.
To be more specific, the CCP is trying to eliminate SPECULATION from the PROPERTY markets. IE: Homes are for living, not for investment.
The housing bubble in the USA in 2008 was made much worse by the massive amount of "buying homes to flip them on the market" (speculation; i.e.: guessing that the price of the asset will rise and you will be able to sell for a profit, with or without making any improvements to the property).
It's a know concept in economics, about the tradeoffs of speculative markets:
Speculators provide a positive, in that they INCREASE LIQUIDITY in the market. In whatever market that speculators are getting involved, it becomes *easier to turn that asset into cash.* That's a positive, as it becomes easier for buyers to find sellers, and vice versa.
The NEGATIVE of speculation, is that they drive up the underlying asset prices. This can lead to wildly inflated prices that far exceed the fundamental value of the asset, AKA, a bubble.
Smart public policy aims to strike a balance. You set up taxes on properties obtained for solely speculative purposes (IE: Not your primary household) to discourage or encourage more or less speculation, in order to manage the amount of "heat" in the market.
In real life (and in the USA), the public that owns homes loves surging house prices, and the public that does not own a home hates it. This creates a bunch of political strife. Especially if politicians think that homeowners are more reliable voters.
Lol please is that why wallstreet banks were called in yesterday. China runs on foreign investment so does every country. They do not have enough state backed enterprises to employ everyone.
You are making the mistake of assuming that there are "good" companies and "bad" companies and you can simply let the latter fail. When you let large segments of the financial system collapse, credit markets tighten and formerly "good" companies also face a crunch. This iterative process can continue a long time (witness the rolling banking panics of the Great Depression).
Insolvency is relative to the credit market. If China faces a serious crash they should do QE. It won't fix everything (and it will lead to asset inflation), but it is better to deleverage slowly over a number of years than to do it through a massive collapse.
Aye, "let the banks fail" plays well politically but when that actually happens the economic blast zone is just too large to be a feasible option. You end up burning the average Joe/Chen AND a bunch of capital holders, so absolutely nobody is happy with you.
Which is why the better solution is to nationalize the banks. Contain the problem, but also wipe out the stockholders and management who otherwise have no penalty for causing a crash.
I don't think everyone in this thread fully understands the enormity of this situation. I'ts amazing to me well china controls the flow of information to the general western public and even moreso to financial and economic analysts who would benefit from such information. This is potentially, depending on a variety of factors, a turning point in the Party's ability to maintain power as economic growth is the basis of their continued public support. Even 3 quarters of negative growth would be absolutely disasterous. This is not simply an economic issue, it will effect geopolitics on a scale we aren't entirely prepared for.
The Chinese economy is absolutely overrun with corporate cronyism and massive government subsidy. I don't know where you got this idea.
It’s now or never.
Except Evergarde isn't in housing its in commercial real estate.
I wish more thought was put into the options China has. Breaking of a social contract and allowing a "come what may" approach OR print money to bail out investors. I did not like the relation to Covid printing in the US. this is far more akin to 08 than stimulus in covid.
The Chinese government already said it loud and clear that there would not be a bailout. Evergrande's debt trap is a rabbit hole and you simply don't what else is waiting down there.
Thing is, on the other side is property values. If they go down due to Evergrande selling them off for a pittance, then suddenly all the other Chinese property developers are going to be selling units and finding they don't have enough to pay the interest on their loans......
And I'm still wondering what the Chinese middle and upper classes are going to make of it when they see their primary investments become either worth half of what they were or are totally illiquid through lack of buyers.
Yep, and that's the ultimate cause of 2008 with us despite the elaborate attempts to blame it on only bankers or whatever. Everyone thought house prices couldn't go down and if it had been true, there would have been no economic crisis
I wouldn't let banks off the hook on this one - predatory loan policies directly led to the crash and unrestrained speculation, poor decision making and dumb leverage rules magnified the severity of the problem. Not to mention banks themselves encouraged the perception that housing never goes down- both because they were making a lot of money off of the mortgages but also on the selling of Mortgage backed securities which they got rated as AAA.
People drove the car into the river but the banks had one hand on the wheel and a foot in the gas
And the government fucking backed the banks instead of letting it crash and burn. The banks should have went bankrupt, but parts of the government let it stay instead, even though every bank that lent bad money should have fell apart and burned. Anyone who touched those mortgages deserved the burn. And the government just fucked it.
They figured the fallout out of bailing out the banks would be less bad than the liquidity crisis they feared was going to occur if they let the banks fail. It's hard to overstate how much the financial sector and the government was freaking out about a full blown meltdown and how desperate everyone was for someone to do something. Sadly as a result of decades of deregulation it meant that letting the banks fail on their own, which would have been the right thing to do in a competitive market, was impossible due to how big they were and how tightly coupled the rest of the economy was to them.
I was OK with the bailouts if it meant a subsequent dismantling/carving up of these institutions to reduce the risk to the whole economy as well as prosecution of the fraudsters. Dodd Frank didn't go far enough, IMO, so neither of these things happened. To me that is far more egregious. In effect it signaled to the industry that if they're too big the government won't let them fail, which is a very bad precedent to set.
Exactly. Add onto that the Holder doctrine that fines are better than prosecution - so the bankers are told "not only will you suffer no personal consequences for reckless behavior, but we'll bail you out, and the only penalty will be pennies on the dollar in fines, which you can deduct from your taxes". And then failed to stop the banks from having that power in the future.
They literally couldn't even stop them from gorging themselves on bonuses right after the crash.
It's one reason why it's so hilarious when people want to complain about Obama being a leftist - he's the best friend Wall Street ever had.
Oh, I would say he's their best friend - they've had congress and presidents very friendly to them for quite some time. It's hard to pick any one era where the politicans have not been very amenable to dismantling regulations for them - at least going as far back as sometime before Regan.
Yeah, in these scenarios, banks are the ones throwing all the wood and gas on the pile, one predatory loan at a time. Then a place like Evergrande throws the match in.
I agree the banks behaved stupidly and as if property values would never drop. But my point is so did everyone else. I remember when politicians were threatening banks not to deny subprime blacks mortgages - and this was ostensibly to build their wealth. Bureaucrats were put on regulating banks to be sure to loan more to minorities. And it made sense if house prices were always going to go up. I worked in seattle in tech and I had all kinds of coworkers who made six figures who were nonetheless buying much more house than they could afford, taking out ARM mortgages that they couldn't possibly pay after the 'bump' but assuming that they'd be able to refi on the higher equity the house would assume in the market. I even had a few friends who were playing around with these 'wealth management products' pointed to in the article - buying a condo in an unbuilt building with 30% (borrowed) down, then selling the unit when it was built and reaping the capital gain. It worked pretty well for everyone and seemed like it would never stop until house prices started to go down..... and this isn't even counting the vast clouds of stupid foreign money that wanted T-bill like safety but also wanted more actual risk that was hidden so it could juice returns to underfunded public pensions.
I disagree that the ultimate cause of 2008 was a belief that housing prices only go up
It was that every banker thought they were smarter than the market, and could beat them out the door when the crash came. So print the CDOs in the meantime!
It's one thing people always forget - by definition 50% of the market is dumber than the market at any time. If you can't point to who that is, it's probably you.
If the subprimes had to be evicted from their homes for not being able to make payments or refi when their ARMs went up, but the houses had appreciated in the meantime, then most of even the most toxic tranches would have maybe lost 10 cents on the dollar. Not nearly all as what actually happened when prices went down.
none gov sector have prop up the stock market.
history shows normal it should stay dip and then when near of . a event(pandemic) it start to go back up... it never did that .
Kinda like US people and stocks and homes? 🤣
If they believed properties never go down, they would buy on credit. In fact, Chinese use property as stores of wealth, not speculation. They are not naive.
Investment vehicles like Evergrande are different. They are leveraged. The leverage in this case comes from people paying well in advance of construction.
Well, it is going to happen. You might be expecting some sort of sweeping depreciation of the real estate market, which is not very likely as I see it. Housing prices in first-tier cities like Shanghai, Beijing, Guangzhou and Shenzhen are resistant if not immune to downward trends, which is pretty similar to what happened in Japan. However, house prices in smaller or even second-tire cities would fall or even crash.
You might be insinuating that home owners will default on their mortgage. I think it is highly unlikely even if they want to. For the past five years, Chinese government has kept the house loan interest relatively high and raised the minimum sum of downpayment to at least 30% of the total value for first-tme house owners and 70% for others. These measures insure that a large chunk of their cash is locked in their houses and the relatively high interest rates (ranging from 4.8 to 6 perecnt) further shaved the froth off the housing market. That being said, banking irregularities persist and can well be the next can of worm. These are the known unknowns which I suspect even the Chinese government does not have a full grasp of the situation. That is why they did a number of stress tests on all the banks in the past 2 or 3 years, which again could be the known unknowns anyway. But I think the results are not bad, otherwise we would have heard something along the grape vine. In Evergrande's case, there were already stories about its financial misadventure as early as 2015. if there is anything bad, you defintely would catch something fishy in the air. China as a whole is not a tightly sealed leak-proof case as outsiders think.
Pretty much. But it's also a massive asset bubble so that may be a somewhat desirable outcome. The middle and upper class Chinese were desperate to find a reasonable investment. Investing in Chinese companies has been historically quite risky and taking money out to invest on foreign exchanges is not easy to do either. So they looked to real estate.
So hopefully this leads to significant legislative change. But I do not envy the hard working Chinese who will see their life savings evaporate almost overnight. Hopefully the Chinese government does what us needed and provides assistance to those who are the worst off.
There is a huge rift of information, but as I understand it, most Evergrande's properties have already been sold off or pledged against debts to deleverage in order to meet the regulations introduced last year. The only thing capable of collapsing property values is sentiment. It's more about the domino effect on unpaid interest, unpaid subcontractors or suppliers and unpaid employees, and reevaluation of risk in broader property market.
From Bloomberg article, [China’s Nightmare Evergrande Scenario Is an Uncontrolled Crash](https://www.bloomberg.com/news/articles/2021-09-16/china-s-nightmare-evergrande-scenario-is-an-uncontrolled-crash)
> Evergrande had 1.3 trillion yuan ($202 billion) in **presale liabilities** at the end of June, equivalent to about 1.4 million individual properties that it has committed to complete, according to a Capital Economics report last week.
> “If Evergrande had to dump its inventory onto the market” it would “drag down property prices substantially,” said Hao Hong, chief strategist at Bocom International.
> Without a social safety net and with limited places to put their money, Chinese savers have for years been encouraged to buy homes whose prices were only ever supposed to go up. Today, real estate accounts for 40% of household assets and buying a house (or two) is a cultural touchstone. While housing affordability has become a hot topic in the West, many Chinese are more likely to protest falling home prices than spiking ones.
I think this analysis is slightly out of touch with China's present reality. Rising housing prices are one of the most discussed topics and source of worries for young adults in China today. The housing price to income ratio is off the roof in major cities.
Those who would not want property prices to go down are still a minority of wealthy people who happen to own several homes for investment purposes. The idea that the majority of Chinese people own apartments to invest in is a myth, and one that becomes more untrue the more you look at the new generation of young adults.
The average Chinese person doesn't own houses everywhere, except the one they live in. Young people today sometimes don't even have that and wouldn't mind it at all if prices went down.
Still, China has like a 90% homeownership rate compared to ~65% in the US, so a bubble doesn't harm them near as much as it'd hurt places like the US.
Yeah but this article put some context on a question I had a few days ago. How big of a hole would Evergrande leave behind and it appears that the hole is 1.4 million housing units and a trillion ~~dollars~~ yuan so... yeah pretty huge hole. I don't see how CCP can avoid patching a hole that big without some crazy shocks to their system.
A trillion yuan. $202B is still a lot, but not as much as you’re thinking.
derp... I meant to write yuan but I also hadn't finished my coffee yet.
The government lied. My guess is that the government will end up owning 1/3 to 1/2 of the company and will cover all debts, similar to AIG in 2008.
So 1990 Japan Zombie bank and Companies style rescue or 2008 credit crisis scenario?
Porque no los dos?
> this is far more akin to 08 than stimulus in covid.
In the sense that it's way smaller?
I am curious about the ripple effects of this.
Usually, banks like this are not isolated -- meaning there are other institutions that are connected to such banks in terms of lending, partnerships, investments, etc.
Also, this will affect the booming construction industry and all the projects that China is betting on. So I don't think the fallout will strictly just be in banking -- but also other industries.
Most likely China will bail them out or pay the employees/customers.
Steel, other metals, cement, other building materials, architecture, engineering, cranes and other construction equipment, property sales and management companies and local governments that sell land (get paid for 99-year leases) to name the most visibly affected. When China hits the wall on 25-story apartment construction, the ripple effects will be at least as enormous as in the U.S. or Spain in 2008. By some estimates there is already enough housing in China for 2 billion people (in a nation of 1.35ish billion). I do not envy the one man in Beijing who thinks he alone can steer through this.
I am wondering what the financial implications im other countries would be, if a complete crash were to occur in China.
The situation seems quite akin to the USA crash of 2008, but I was too young to fully understand any implications we had on other foreign markets.
Can somebody please break this down for me?
If there's a housing bubble that goes pop in China, I would expect that it puts a huge damper on the Chinese economy.
This will add to the issues we are already having, in regards to global supply chains.
That will worsen short-term price pressures, resulting in some amount of additional inflation, here. (Chinese manufacturing makes a lot of components that go into the things assembled here, and globally. More scarcity in those components will cause prices to rise, generally.)
On the long-term horizon:
Globalism is showing its weak side. A problem anywhere, becomes a problem everywhere. There has been a dramatic shift towards ON-shoring (the opposite of offshoring), especially in manufacturing. Big businesses are putting seriously thought into reducing the complexity of their supply chains. For the long time, it was "procure every individual component at the absolute cheapest rate, no matter where it is in the world." This resulted in absurdly complicated supply chains, that worked well in a stable world.
Then COVID happened. All the sudden, Ford F-150 assembly lines in the USA are shutting down (or running at half-capacity), because they can't acquire enough of the simple $0.50 semiconductors and $0.10 fuses that they need. These ultra-basic components that we procured for rock bottom prices from every corner of the world, they just aren't available when COVID is absolutely wrecking countries with vaccination rates in the single digits (and where their hospital systems can't keep up) so their manufacturing shuts down.
Business leaders are understanding there's value to having the capacity to make basic components HERE, in the US, even if it is expensive. Hooray!
Supply chain management is one of the little understood sub-sectors of manufacturing that people just don't even know exists. And it's blown up in the past several decades, in its sheer scale and complexity.
Even call centers are back now which is crazy, but there are a ton of college grads willing to work for 15-25 an hour here
Many of the subprime mortgages in the 2008 crash were marketed as investment-grade; Chinese company bonds are considered much less trustworthy, so I imagine other countries’ banks aren’t as heavily invested in evergrande as they were with lehman brothers and the like.
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