What a Collapse of China’s Evergrande Would Mean

China hasn’t bailed out its over-indebted property developers yet, to the shock of foreign investors who’d bought their dollar bonds. Could the forced deleveraging trigger a financial crisis?

By Wolf Richter. This is the transcript of my podcast of last Sunday, THE WOLF STREET REPORT.

Property development has been a huge factor in China’s economic growth. It accounts for 28% of GDP. And much of it has been funded by debt, including dollar-debt, and much of it is now blowing up.

Foreign investors piled into the property sector over the years, buying hundreds of billions of dollars in bonds, including dollar bonds issued by China’s property developers. They bought those bonds because they liked those yields, in some cases over 10%, thinking that the Chinese government wouldn’t let those companies default, that it would bail out the bondholders as it bailed out so many bondholders before, and surely it would do it again, given how crucial the funding of the property sector is to the Chinese economy.

And now just about everything has gone wrong for these foreign investors. For months, there has been a massive crackdown by Chinese authorities on liquidity-driven inflows into the housing sector.

Authorities cracked down on overleveraged property developers. They targeted mortgage approvals and interest rates for first-time buyers. They tamped down on rental growth. They pushed banks to reduce their lending to homebuyers. A national property tax has been put on the table.

And this was topped off with an increasingly strained relationship between the Chinese government and the United States government, that includes major steps by the US government to crack down on speculation by Chinese entities in the US stock markets.

China’s crackdown on property speculation is guided by the official mantra that “housing is for living, not for speculation.”

That massive amount of speculation and leverage has for years posed enormous risks to financial stability. And the government is now trying to defuse those risks – and it looks like at the expense of foreign investors that have bought those hundreds of billions of dollars in bonds.

Those foreign investors are suddenly realizing that they’re no longer sacred and that the government may not bail them out.

Bailouts had been taken for granted, given how important the property sector is to China’s economy, and foreign investors whose money was needed to fuel that property speculation, had felt secure in their thinking that China would bail out those bonds if push came to shove.

Now push is coming to shove.

Evergrande Group, the second largest property developer in China, and the property developer with the most debt in the world, owes banks, shadow banks, other companies, investors, its suppliers, contractors, and home buyers $305 billion, according to Bloomberg.

It hasn’t been able to sell a single dollar bond since January 2020, and has no prospects of doing so as foreign investors have gotten the message.

On August 31, it said that work was suspended on a number of real-estate projects after it delayed payments to its suppliers and contractors. It warned that it may default on its debts if it can’t raise new money.

If it was difficult to raise new money before, it became impossible after that announcement – unless the government steps in, and that hasn’t happened yet.

On September 7, Moody’s and Fitch downgraded Evergrande Group and a number of its entities deeper into deep-junk, to ratings that indicate that a default is imminent with little recovery for investors in those bonds.

Moody’s said that the downgrade reflects the company’s heightened liquidity and default risks given its large amount of debt that will mature over the next 6-12 months.

Since Evergrande does not have enough cash to pay off the debt that matures over the next 12 months, it has to raise new money to pay off those old investors. If it cannot raise new money, either by issuing new bonds, or by borrowing from banks, or by selling assets that are not already leveraged to the hilt, it will default on those maturing bonds.

Fitch, when it downgraded Evergrande on September 7, said that “a default of some kind appears probable.” It based this on tight liquidity, declining sales, pressure to address delayed payments to suppliers and contractors, and little progress on asset sales.

On September 8, Evergrande told two banks that it would suspend interest payments on bank loans, according to financial intelligence provider REDD, which cited four sources briefed by bankers.

Evergrande has already suspended interest payments to several trust firms, and may suspend all payments to its wealth management products, according to REDD. This would rile up retail investors that put their money into those products.

On Friday, so September 10, Evergrande said that its contracted sales of properties in August, including sales to suppliers and contractors in exchange for money it owed them, dropped 26% compared to a year ago.

In Shanghai, trading of its bonds that mature in 2022 and 2023 was suspended last week after they collapsed. Evergrande’s bonds have been blacklisted and can no longer be used as collateral.

Evergrande’s shares, which trade on the Hong Kong Stock Exchange, have spiraled down since late 2017, and on Friday closed at the equivalent of about 45 US cents.

Evergrande’s dollar bonds have collapsed. On Friday in Hong Kong, its dollar bond due in 2025 traded at 29 cents on the dollar. In May, those bonds still traded at 80 cents on the dollar.

But it’s a whole industry. Evergrande just has the most debt.

Four other major Chinese property developers are now teetering. The dollar bonds have collapsed, on fears by international investors that those bonds cannot be refinanced when they mature, which would mean a default. These fears further limited the ability of those property developers to issue new debt to raise new money to refinance those maturing bonds and pay off existing investors.

This is the vicious circle that overleveraged companies find themselves in when investors belatedly get cold feet after having eagerly swallowed all the hype and hoopla for years. And then suddenly, the endgame starts, with everyone wondering what might be left for them when it’s time to poke through the debris.

The four property developers are Fantasia, China South City Holdings, Guangzhou R&F, Xinyuan Real Estate Co. Their bonds have fallen below 60 cents on the dollar, and in some cases below 50 cents on the dollar, indicating a high probability of default.

Other property developers have already defaulted. So far this year, property developers have defaulted on $6 billion in debt, about five times as much as over the prior 12 months combined, according to Morgan Stanley, cited by Bloomberg.

This includes China Fortune Land Development Co., which has nearly $10 billion in bonds outstanding, including $4.6 billion in dollar-bonds. In March, it defaulted on $550 million in dollar bonds. Last month, Ping An Insurance Co. disclosed that it wrote down its investment in the developer by $5.5 billion.

For now, developers that are less leveraged and have credit ratings that are less deep into junk, are faring better.

So will the collapse of these overleveraged property developers cause a financial crisis in China?

It could. But some of the biggest losers are foreign investors that bought those bonds, and not Chinese banks; and for a financial crisis to happen it would have to sink China’s banking system.

And then, China has some unique tools to ward off a classic financial crisis.

The government controls nearly everything, including the central bank, the big four state-owned commercial banks which are the largest banks in the world, the bad-banks which absorb the bad loans, big asset managers, and most of the largest companies, and much of the media, including the social media, specifically with regards to financial stories.

In other words, the government controls the money, the lenders, the borrowers, the buyers, the markets, and the message.

The government can order the big four banks to exchange defaulted loans for equity stakes and forget them. It can tell the central bank, the People’s Bank of China, to do whatever it takes. It can tell state-owned asset managers and pension funds to buy shares and bonds to prop up prices and to fund companies. It can tell the bad banks to buy bad debt from commercial banks.

The government has a long history of bailing out bondholders. And it has a history of bailing out investors in risky schemes that have blown up – including regular folks chasing after the latest bet, such as Evergrande’s wealth management products and apartments in unfinished buildings.

When enough of these folks start protesting in Beijing because they lost oodles of money on some mass-scam they’d fallen for, including property investments, the government, fearing social unrest, steps in and takes care of it. That’s how it has done it in the past.

And the holders of dollar bonds have been counting on it.

This property debt that is now blowing up has funded years of economic expansion and huge projects and millions of jobs. And foreign investors were fairly sure they’d get bailed out when push comes to shove.

So far, these special tools have helped the government to avoid a financial crisis.

But now it looks like the government is forcing a brutal deleveraging on the property sector to bring down risks and tamp down on rampant speculation and price increases. It looks like an effort to rebalance the economy away from property development.

It looks like investors are invited to eat the costs of this forced deleveraging. It looks like the government is teaching them a lesson, namely that they might not get bailed out, and that the flood of liquidity into the property sector was misguided and needs to end.

And it looks like the government is willing to take the risks of spillover effects into the broader economy and credit markets. And if, in fact, the government refuses to bail out bondholders, and allows a large-scale bloodbath among investors, particularly foreign investors, to occur in order to deleverage the economy, that would be a sea change for investors in China.

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  260 comments for “What a Collapse of China’s Evergrande Would Mean

  1. Red says:

    Maybe I should have been born Chinese.

    • RH says:

      If you had been born Chinese, you had better hope that you were not connected with these companies. LOL. People that make Pee Pee de Pooh unhappy tend to disappear or get executed or sent to terrible prisons for decades or if still young and healthy, get their organs harvested. Great report by the way Wolf, always with great depth.

      This could not happen to a nicer bunch of CCP crooks! My heart bleeds for them, since the hundreds of billions of losses will surely cause the CCP to execute them, unless they are among Pee Pee’s lovers or relatives.

      I wish them the best: in communist China. That means that I hope that Pee Pee gives them the usual, pro-forma, quick, “fair” trial, followed by the mandatory convictions (100% conviction rate!), rapid and not too cruel execution, and decent burial/organ harvesting, hopefully AFTER they are already dead.

      (Getting broken up by Elizabeth Warren might suddenly be looking pretty good to the US banksters now. LOL)

      On another, happy subject, Blackrock was reported as being a major creditor or investor. Oh, Joy! Christmas is coming early this year! God has a great sense of humor!

      Could US banks also be on the chopping block? Pretty pleeaasee.

      After all, if any of of their MANY, MANY “investing” (gambling) counterparties fails due to these Chinese CCP RE frauds, the US banksters’ banks may also suddenly be insolvent. US banks usually have reserves that are minimal in terms of their exposures and gambling liabilities: their capital is like a thin, eggshell over a huge mass of liabilities.

      Reportedly, their “Federal” Reserve removed even the requirement for these minimal reserves months ago. If one of them is holding these CCP-companies’ bonds or worse, is actually a “shareholder” who “invested” in their crazy variable interest entities, then…. LOL.

      Does anyone else sense another “Federal” Reserve, secret bankster bailout coming– if the banksters can still keep it secret? I suspect that their “Federal” Reserve is going to have to give some banksters more bailouts and again while their bank is insolvent as their banks were insolvent in 2008, give them ultra-low interest rate loans, so those compulsive gamblers can “recapitalize” by stealing from Americans: e.g., by charging us 25% per year on credit card purchases and any fees that they can invent, while paying the “Federal” Reserve MUCH less than the REAL rate of inflation on the money it loans to them?

      Is it just me that feels another secret, “Federal” Reserve, bankster bailout coming soon? Boy, a lot of meth or heroin addicts would have loved to be banksters: they could just have spent/gambled/or wasted billions and their “Federal” Reserve would always be there to “recapitalize” them like a loving uncle — with other Americans’ money of course.

      • Arnesto L says:

        Befie the Great Depression, Credit Anstahlt Bank of Vienna , In elieve failed.JP Morgan and the other Big Solvent banks would not bsil them out and the whole world wide banking system collapsed. History Rhymes.

      • Alan says:

        This!

      • joe2 says:

        Great rant.

      • RH says:

        New reports:
        CCP gangsters will take over and run Evergrande with their usual level of financial acumen?!! It will be like my turning over control of my sports package, 330i BMW to my dog at 90 miles an hour on a narrow, costal highway! LOL.

        Can we watch? This should be on pay per view. We all love disaster movies and have not gotten good ones for a long time! I just fell off my chair laughing at my own comment!

      • monday1929 says:

        Yes, The Real Socialists are the money center banks, but those who hate Socialism never seem to mind this redistribution of Wealth to those Failed bankers.

    • Djreef says:

      I dunno, I think China is about to experience their very own 2008.

      • Tony says:

        So is the rest of the world together!

        • michael ocallaghan says:

          interesting to know which western pension funds are exposed to the looming crisis

        • Argus says:

          Yes, and the usual suspects lent money to Evergrande, including Barclays, Credit Suisse and Wells Fargo.

    • Paddy Jim Baggot MD says:

      i had a thought this morning. pardon my ignorance if im way off base.

      it seems like evergrande is a hong kong firm.
      Could beijing conduct economic war on hong kong
      or disempower hong kong

      by letting hong kong firms fail

    • RH says:

      To rectify my prior, angry comments which might be misunderstood, after reading them later, the CCP members, the Wall Streeters, and the banksters (who are relatively tiny, parasitic, powerful groups) have been harming both Chinese and American people. While they may belong to particular groups (e.g., most CCP members are Han Chinese from Buddhist backgrounds even if not devout, who are racist and discriminatory toward Uighurs, Tibetans, Falun Gong practitioners, and others), the religious, racial, and ethnic groups from which the CCP members, Wall Streeters, and banksters are drawn are also among the victims of those crooks.

      For example, the huge pensions that 1) the Wall Streeters, 2) crooked rating agencies who gave them fake ratings, and 3) banksters who financed/packaged/transacted the uncollectible loans, effectively looted by selling them garbage subprime loans before 2009 lost BILLIONS in pension funds belonging to workers from ALL religious and ethnic groups in America. Only foolish or very lucky Americans can claim that they were not defrauded: e.g., the inflation from the “Federal” Reserve’s money printing to give secret, TRILLION dollar bailouts to those persons listed (in 1 and 3) is depreciating all of our wages, savings, etc.

      Many of the reportedly 90,000,000 CCP members only joined because they needed their red card to get decent jobs, etc., but have not performed any evil deeds, and some are trying to keep a clear conscience by “lying flat.” That is why I feel deep sympathy toward the Chinese people, who have been living like abused hostages of or sheep to be sheared by the worst, maybe 10,000, CCP leaders, which 1+ billion hostages are suffering from Stockholm syndrome in mainland China.

      Similarly, the 10,000 or 20,000 or so Wall Streeters and banksters (like privileged criminals in other countries, such as poppy growers/drug producers if Afghanistan or drug cartel members in Mexico or Triads in some places) live like leaches, lice, and fleas parasitizing and sucking the wealth of 97% of Americans of all groups, including the honest majority of their own groups. Even the majority of their employees working in their banks and financial institutions are used and abused.

      For example, if you can, you may find instructive a video interview given by a scmbg bankster right after 9/11 in which he complained words to the effect that his business was severely hurt by one of the towers’ collapse, instead of feeling bad about his many, innocent, and recently murdered employees! That interview was rapidly cut off by the network broadcaster, of course.

      (My estimate of 3% of Americans not abused by those groups in 1-3 references those Americans with their own businesses, professionals, famous athletes, etc., who are financially independent if not really rich, not particular ethnic, religious, or racial groups.)

      • joe2 says:

        I’m sure you speak for many who are not as eloquent.

      • monday1929 says:

        Thank you RH. Remember that Citi’s Trillions in Welfare were kept secret by the Fed until 2011 or so when a forced audit made them reveal that. Remember too, that Robert Rubin and Chuck Prince were referred for indictment by the FCIC, but not another whisper was ever heard on that.

    • Mira says:

      Oh, 😔.. never mind.

    • Equelan2 says:

      This is seems like a war between Chinese property developer giants, their investors and Chinese Banks. Banks are demanding payments for their “rightfully” interests and given loans while development companies refusing to pay due to their bankrupt. Furthermore, Chinese goverment is just watching dieing of not only Evergrande but many huge development companies. Trilions of dolar at stake. At the other side those big companies and their investors has two bullets which may severely hurt Chinese government or even spark the big financial reset across the world. Their first bullet is due to halting of tens of housands of construction projects millions of Chinese people will be unemployed and they may be supported by some shadow financors in case of massive unrest and civil protests happen at the streets of Beijing. The second bullet is: Those companies will drop real estate prices they are selling maybe 70% and more. Since not many people willing to buy or throw their money to a half constructed city where real estate prices across China will decrease dramaticaly. People will refuse to pay their mortgage bills to Chinese Banks because they will realise their house not gonna worthy with respect to their depth to banks. So then Chinese Banks will start to bankrupt and this financial crysis may spread other banks too. Those Banks will increase their interests rates to save themselves and that is gonna be the time when financial reset will begin. Because investors will flee from stock market to give money to Banks with high interests rates. Companies will bankrupt and massive layouts will happen. While stock market is droping thorough abbys people with no job, no food, no family, no future will take over governments. Because they have noting left to lose. Thus will be begining of One World Government. A new world order version 2.0 where an advanced AI would rule the world. Of course i skipped part about some conventional wars may break out among those conflicts.

  2. Álvaro (from Spain) says:

    I wonder how reliable is the information we have about this. If Evergrande’s numbers are as reliable as China’s covid numbers, we may as well declare bankruptcy just now.

    • Wolf Richter says:

      The bonds it issued are tracked and known and registered — people own them and trade them. Its total liabilities of $305 billion are known too. But as always, when a company collapses and auditors and investigators pick through the debris, they will find all kinds of stuff that wasn’t disclosed.

      Remember the Spanish green energy giant Abengoa that collapsed, and not just once? https://wolfstreet.com/tag/abengoa/

      • Álvaro (from Spain) says:

        Oh, I’m glad some non-Spanish knows about the Abengoa fiasco… Most Spaniards don’t even know about it.

      • RH says:

        I wish that betting were legal. If it were, Wolf, I would give you two to one odds on a $200 bet that Evergrande’s real, total liabilities NOW (at the end of their rope) are at least twice as large as reported (e.g., $700 billion) because there is a lot of what we, Americans, call loansharking, a.k.a. “shadow banking,” going on in the CCP’s China and the Evergrande managers probably knew that they might be executed if they embarrassed the CCP by defaulting while their debts were still $300 to $450 billion. That means that they probably got loans that grew rapidly from CCP loansharks long before now.

        Since they are running out of money to even pay employees now, that means that they were not allowed to borrow anymore, even by what amount to CCP loan sharks! What I really wonder is if these billions of losses will bankrupt their creditors and investors or counter-parties or the foreign counter-parties of those creditors/investors!

        This may ultimately be like a row of financial dominos suddenly toppling one after the other, if you think about it! Lehman moment?

        Remember, that this will sink the real estate market in China (and many other, thinly-capitalized CCP developers) if prospective Chinese “purchasers” panic and flee from making more “investments” after the Evergrande purchases likely lose everything. Too many RE owners in China are buying not to live in the property but because they expect to sell the property for a profit.

        If a lot of RE goes down the toilet in value, the other investors will seek to dump RE en masse to limit their losses. It may be like a CCP, nuclear chain reaction of CCP crooks “blowing up” economically. LOL

        • RH says:

          Reading my prior comments may cause a reader to conclude that I am obsessed with the word “CCP.” However, in mainland China, joining the CCP is like joining a large organization in America, except that you get huge privileges and become a member of the most privileged group.

          That is why there are reportedly over 90,000,000 CCP members in China, most of whom doubtless resent being forced to read Xi’s little book of his “thoughts” and are only pro-forma members, like many Americans are only pro-forma members of their churches. (Statistica reports 95.15 million CCP members, but in mainland China all numbers reportedly get inflated, so I do not rely on that number.)

          While they are pro-forma members, like holders of Bitcoins, CCP members hate seeing their “investment” in CCP membership downgraded with negative comments. That is one of the reasons why the CCP has retained power for so long, and the murders, of course, so many, many murders and also killings through negligence, like by releasing water from reservoirs without notice.

        • Mira says:

          “RE owners in China buying to realise sales profits”

          Down here in .. Au👁‍🗨👁‍🗨land .. they buy because the loopholes are brilliant & the market is protected by government.
          No one would be silly enough to sell.

      • Al says:

        Does the $305b include the ~$32b of commercial paper they’ve given out? Where does commercial paper sit in the priority of creditor to pay back?

        • Wolf Richter says:

          Yes it includes the commercial paper (short-term bonds). I don’t know who holds it. Tether came out today and denied rumors that it still holds any of it. There is going to be a lot of denying going on.

        • char says:

          Do tether also deny the rumor that they don’t hold any money, which is i think the more like reality of tether

      • Mikey'sQuestions says:

        How can you find out what Americans pension funds, insurance Co’s, HF’s or PE’s invested in these bonds?

        • Wolf Richter says:

          Mikey’sQuestions,

          I (me personally) can’t in the global sense. Brokers and prime brokers know what their clients hold, and they have some insights. If you own a bond fund, you can check the top holdings, and that would tell you if Evergrande paper is a big part of the fund. In terms of pension funds, I’m not sure, but I don’t think they disclose the details of what they hold. Life insurance companies don’t until they have a big write-down on this stuff, such as Ping An, which disclosed last month that it wrote down its holdings of Evergrande paper by $5.5 billion.

        • Mira says:

          Aren’t they all .. all but gone .. some unemployed in Au!!!land who were deemed ineligible for pandemic financial support were asked to draw financial support from their super fund money .. leaving them with nothing for their old age.
          Convenience seems to be the name of the game ..

        • Mira says:

          Monash University will be finished if the international students do not return.
          They are beside them selves with worry .. all those lovely new buildings empty not to mention Australian the large proportion of academies unemployed.
          No thinking went into this pandemic party game ..

  3. Lynn says:

    That’s interesting. Combine that with the probable crack down on Macau. I think both are known for laundering big money and capital flight.

    From the horses mouth;

    “At least 1 trillion yuan (US$145.5 billion) worth of funds flows out of China into gambling activities every year, aggravating the country’s economic and financial security risks, according to a senior official at the Ministry of Public Security.

    Gangs running illegal gambling operations use digital currencies to collect and transfer funds, making it difficult to trace the source and adding significant challenges to investigations, said Liao Jinrong, the director general of the International Cooperation Department ..”

    And then to real estate all over the world…

    • MCH says:

      It’s what you would expect when government screwing around like a bunch of incompetent bankers.

      I am just waiting for the lecture from our treasury about the moral hazard of China’s state owned financial institutions and the advantage conferred by a free market. I wonder if the appointed She-J can even say it with a straight face.

      But that’s ok, we can print our way out.

    • Djreef says:

      This is the big reason I liquidated my China Trades. There’s too much mud in the water to swim.

    • Same process happening in the US in the early 2000s. Then it was Caribbean online casinos. VC fronts took the money, and a lot of it was campaign sluice from Jack A, and Tom D. But offshoring was so popular the free lunch seminars were selling the products retail. Now that money is in Cayman banks. One reason QE works, the money disappears, the Fed replaces it, and offshore accounts where the money is stashed are buying stock through the back door, SNB etc. Shyna has the will to rein in capital flight, but do they have the ability. Their digital currency is fully traceable?

      • Old School says:

        This is 50,000 ft view, but does China know it’s on now? The Western democracies are in the process of divorcing from China. Taiwan, Japan, South Korea, Australia, UK, USA, Philippines, Vietnam don’t want to cast their lot with Totalitarian state anymore and China is trying to prevent economic collapse. Don’t know, just guessing.

        • Lynn says:

          Welp, they’re not stupid.

          My uneducated guess is they will suck in as much global money in stocks and investments as they can with each “business” or whatever just before they either shut it down or confiscate it. Whoops! Your money’s gone! Or at least some of it. “Oh, such a bad company.. Why, it’s the company’s fault..” China seems to make it a well hammered point that all business in China is China owned, essentially. If not in whole then certainly a large cut and control.

        • Thomas Roberts says:

          Old School,

          They mostly know, Xi keeps talking about the economy moving inward. Right now, they are increasingly dismantling joint venture produced cars and foreign electronics to reuse parts in new products. Many electronics sold in China, have recently been discovered to contain reused circuit board parts, especially parts like memory and processors. They greatly overestimate their hand though, they also don’t seem to realize just how fast and hard they will be hit though, once the western companies give up on the China market dream. Last I heard, no Hollywood films have been approved for release into China in months. Xi seems very willing to close off China from the rest of the world, but most CCP are not so keen on it. The CCP doesn’t seem to grasp, how separate industries are outside China; meaning that even if alot of American companies are selling stuff in China, if Hollywood isn’t making money off of China, Hollywood will turn on China and that could greatly hurt their image. In China, different industries are more supposed to achieve common goals for the party.

          As for Macau, it’s important to remember that nearly all the money in China, is owned by CCP members. Macau, unlike Hong Kong, observes the great firewall and censorship that the CCP wants. The top members might want more money to stay in China, but still want to get money out themselves. It’s important to remember that most of the families of top ranking CCP members live outside China. Macau because it is a separate visa zone (and functions largely as a separate country), could be kept open, but entrance could be restricted to varying degrees or the money flowing from the mainland into Macau could be restricted into certain ways; as to allow the higher ups to get their money out and the lower members being prevented from doing so. Macau is likely the safest place to be in China. Anything could happen though. The next CCP “election” is next year and that could greatly determine the future of China. The CCP does have fantasies about creating free trade zones in China, and that the world is just going to treat them the way Hong Kong was treated. Macau is the only place that could legitimately happen to some extent.

      • Lynn says:

        I have a fuzzy picture of that and am convinced that both avenues are why I can not buy a house.

        I don’t know who or what Shyna is??

        But all they need to do is require fund tracing/proof of source with foreign real estate purchases to cut back some percentage of that. They did a trial tracing/proof of source requirement program in Miami, NYC and another place and foreign RE sales dipped 30% immediately. The trial program proved itself but was probably not followed through on because of dirty US politicians.

      • c1ue says:

        No country in the world has both the will and the capability to stop all capital flight.
        But China has been extremely active in cracking down on all of the known avenues.

    • Nick Kelly says:

      Since Xi is getting all virtuous about RE investing, it will be interesting to see what turns up about his personal holdings. It may be harder to find than Putin’s Palace (1.3 billion US) but it could be done.

      • Thomas Roberts says:

        Fake.

        • Nick Kelly says:

          Well we know the palatial structure exists. After the Russian expose an oligarch dutifully stepped up to say it was his. Maybe he is also such a hockey fanatic that he wanted his own full size rink.

        • Thomas Roberts says:

          A building exists that a faker created a fake cgi rendering of the interior of, that was claimed to be the actual design. There is nothing showing putin had involvement with the building, to any extent. Since then, the building owner, has stepped forward, showed the interior of it and explained how it would be used (Apartment hotel).

          Your fake story doesn’t make sense, because nobody could own such a large property on the sea and not have the public figure out who lives there eventually. Now, that it’s stated to be an apartment hotel, it won’t be able to be privately used by only putin, without people noticing. All you got is an accusation with zero proof and a story that doesn’t add up.

        • Nick Kelly says:

          The story broke in Russia via the opposition, and since then anyone going anywhere near it has been run off ((at best) or detained.
          Not all locations on the rather large Black Sea are easily accessible. The private road accessing the property was built to access this property.

          There is a long tradition in Russia, going back to the days when it was important to hide wealth in the supposedly socialist USSR, to hide luxury dachas far from the prying eyes of the proletariat. The latter were not even allowed on the access roads, a stricture apparently applying to this property.

          The normal procedure when building a swank resort is to publicize every move from breaking ground to gala opening.
          This is too important to any commercial venture to pass up.
          No one knew about this place until a few Russians discovered it.
          Any info on opening day?

        • Thomas Roberts says:

          Just try to sneak into any gated community in any country or near any really expensive private buildings, especially those under construction, almost anywhere in the world; you’ll get arrested. In some countries you’ll be disappeared.

          It’s a very expensive “apartment hotel”, once completed, you may have to apply to see it and then pass a check to actually rent there. You are thinking of a hotel that is open to the public, with cheaper rooms that are priced for the masses. This is only for rich people, places like this, usually try to keep much more private. There are many many similar locations such as this in America, Europe, and beyond.

          Most of the opposition figureheads in Russia have no credibility, many news agencies in America and Europe hype up scam artists and loonies; western countries treat them worse than Russia does, just look at Pyotr Pavlensky. In Russia he got 18 months for lighting up the entrance to an intelligence agenccy building, let’s see what happens if an average “activist” in America, the UK and China, does that, my guess is they won’t be as lucky. In terms of corruption, Russia is currently, probably, slightly better than the UK and America, and worse than Germany. Like America and the UK, the “opposition” in Russia is a joke. All these countries need better, real opposition.

          Nearly all the super rich in the world, try to keep out of sight, when they don’t, be even more worried.

        • Nick Kelly says:

          ‘let’s see what happens if an average “activist” in America, the UK and China, does that, my guess is they won’t be as lucky’

          Russia is very lenient with political dissidents ( unless they are Chechen). If a mob stormed the Kremlin, smashing doors and windows, assaulting guards, they would be ticketed for misdemeanors.

        • Thomas Roberts says:

          The Russian protesters breaking into the Kremlin will get some prison time, but they will get alot less than American protesters who break into the Penntagon (some won’t survive), and the Chinese protesters breaking into the Ministry of State Security headquarters in Beijing will never been seen or heard from again.

        • Nick Kelly says:

          ‘Russian protestors breaking into Kremlin’

          I agree the guys in front would get less jail time than in the US.

  4. Mike says:

    Sounds like the Evergrande collapse will be entertaining, but probably mean nothing.

    I know not how big this company is compared to other large Chinese failed mega corps, but my guess is that there isn’t any risks of contagion in their economy.

    One thing I’m curious to see is if the vulture funds go after the Chinese government after they pick up the bonds for pennies on the dollar.

    Sounds like the bonds have wired covenants and if the CCP is dangling the strings to reprioratize payouts, it might be fun to grab some popcorn and see some fireworks.

    • JoAnn Leichliter says:

      Well, there’s plenty of video out there of blocks of “new” unoccupied buildings being imploded… What happens when you build a city and nobody moves in? China has serious, serious problems, and they aren’t just in the construction sector. Its banking system is riddled with uncollectable debt and has been for decades. Large swathes of various regions have been innundated by recent and not so recent flooding, which has made for more homelessness and has wreaked havoc with food supply (especially pork, a staple). Add to that their increasing demographic difficulty. What does all of this mean? Heck if I know, but it looks as though the Mandate of Heaven is wearing pretty thin.

      • Djreef says:

        It warned that it may default on its debts if it can’t raise new money.

        Sounds like a Ponzi scheme, don’t it?

        • A says:

          No society has ever built a perpetual ponzi machine. Eventually, the pain always comes.

      • roddy6667 says:

        Where are these cities they have built where “nobody has moved in” Name three. Videos on the internet are not reality. On this subject, all the nonsense about Ordos, especially the one by Time Magazine, are the most dishonest. Chinese buy new homes as an investment and also as a wedding gift for their child when they get married about age 30. This can be done decades in advance. The homeowner rate in China is 130% because of all the empty homes bought for the future. However, they were purchased, most for cash, before the project was finished, In some cities, the ownership rate is 200%. These empty homes are not a sign of financial failure, but a sigh of prudent mony management and planning for the future.

        • sunny129 says:

          roddy6667

          Are those numbers based what Chinese have provided?
          Can you link up articles to back up argument, other than Chinese source? Thank you

        • roddy6667 says:

          Sunny19 Links and articles are not proof of anything. After more than 7 years living in China I have first hand knowledge of things. I have owned a home in a high-rise since 2009. Everybody you know owns more than one home. In our complex, we have a lot of empty units, and the builder moved on about 2012. Nobody that has spent any time in China contests these numbers. Present day homeownership rates built on the base provided by the old system. Until 1998, every head of household got a free home from their job. The more you made and the better your performance, the larger and more prestigious the home. No mortgage. Free, Right now there is no property tax in China. You can buy a new home and sit on it for a log time with very little carrying expenses, so everybody does. When you buy a new home, it is a concrete shell. Plan on another 20% to finish it. A small percent of builders provide this service, but it is mostly done by the massive design centers that are in every city. You pick out your appliances and decor and they act as the general contractor and finish it for you, turnkey.

        • Thomas Roberts says:

          roddy6667,

          While the air made my allergies go crazy and so I only ended up being in China, for a few weeks, I did in fact see many of the vacant buildings, and on the train, I passed some small ghost cities.

          There is no debate to be had, you are simply wrong. There are many many ghost cities and buildings throughout China. Expats I met in China, who were there longer than you claim to have been there, talked about them too.

          A couple of expats in Kunming explained to me, that some foreigners come to China, never leave the big city they are in for years (they are always in one of the best cities in China, and only go to best areas), before shipping back out. These foreigners are in a bubble and never actually understand China. Chinese people are taught from birth to save face and to never make China look bad.

          This leads me to a conclusion, you either, actually lived in China for 7 years, maybe traveled a little, but never even understood what was going on around you (this is a real possibility, this happens), or you are a troll.

        • Adrian says:

          That’s a very interesting concept. Basically planning ahead. We are making the mistake of looking at China through our Western eyes but the chinese do have a history of playing the long game. Instead of playing catch up they might be building infrastructure years in advance.

        • Lynn says:

          “Videos on the internet are not reality.”

          Really? Then I suppose AlJazeera must be staging massive new empty cities with trash lying all just to trash China. I suppose we had better believe you than any accredited reporter.

          It doesn’t sound like everyone can buy a home or have free rent. Some people even seem unhappy about the whole fiasco.

        • Thomas Roberts says:

          Adrian,

          Xi threw all the CCP’s long term planning out the window. China’s population has already peaked and if supposedly everyone already has their own apartment, who are these future ones for?

          Residential zoned land is leased for 70 years in China and buildings are not designed to last longer than their leases. Most buildings aren’t going to last anywhere near their full lease terms. The reason so many apartments were built was because, the CCP restricts taking money out of China and there is no where else to stick your money inside China. Average Chinese, don’t trust the Chinese stock market.

        • Nick Kelly says:

          Re-upping the stunning demolition videos showcasing housing oversupply in China: 15 skyscrapers in China that were part of the Liyang Star City Phase II Project were just demolished after sitting unfinished for eight years due to absent market demand.

        • Wolf Richter says:

          Nick Kelly,

          But hey, they contributed to GDP twice: the cost of construction added to GDP, and then the cost of demolition and clean-up of the site added to GDP. Win-win! That’s how you push up your GDP :-]

        • roddy6667 says:

          I have given up trying to educate people who spend 2 weeks in China and think they know something. You saw ghost cities. I don’t thi I so. There are a lot of projects. not cities, that sit for a few years because the builder went broke or big off more than he could chew. In a couple years, the city sells it to another developer and he finishes it for a profit. I live in one of these. These are a very small percentage of the total housing. But to Americans it seems like a lot. They cannot comprehend the scale of infrastructure construction in China.
          I guess these days if you don’t hate China and Russia you are a commie or a troll. Enjoy your opinions.

        • Thomas Roberts says:

          It’s very simple, the various local and provincial governments in China are given impossible gdp targets every single year and they have to beat last year’s made up gdp number. If they don’t, they are replaced, how can random places in the middle of nowhere, make these targets? Overbuilding housing and sometimes factories. No caution is given to building things safe or if it makes sense. Build anything anywhere, as much and as fast as you can. Alot of these projects could never be used, because they aren’t done safely and they are too far away. This plus the fact that the population has already peaked.

          Other countries could make buildings just as fast, if they followed zero rules and didn’t care about safety.

          I have concluded that you are a troll. Also I don’t hate China, the fact is the CCP has started a colld war with the world, because of the selfish pursuit of money and power by the CCP higher ups. I am just clearing up misinformation from the trolls, so people can understand the situation clearly. Also, I don’t think anyone, would accuse me of being against Russia.

      • intosh says:

        “Heck if I know […]”

        Well, looks like you DO “know” a lot.

        About the unoccupied buildings and ghost cities, I recently read an article making a point that all those videos and stories about them we saw years ago were just “doomsayer” material. The article said those buildings and cities became normal buildings and cities, with occupants and economic activities. Remember, this is China — authorities can make things happen very quickly and at a very big scale.

        So who and what to believe? Personally, I think reality is probably something in the middle.

        • Wolf Richter says:

          intosh,

          Remember that in China, people own apartments like Americans own stocks. So a wealthy household might own 20 or 50 or 100 apartments. Generally, they were new-builds when purchased, and aren’t finished inside, and aren’t rented out. They’re held for capital gains. So you can have big buildings with few people actually living in them, but all units have been sold.

          We have some of the spillover effect of this in San Francisco with empty condos owned by nonresident investors.

        • The good German says:

          It’s interesting that Evergrade was not able to sell assets within 6 months since its liquidity woes accelerated. So, despite steep discounts in “prime location” and distressed funds are washed with cash, they were not able to sell?
          Also, some recent PE in the RE market got pulled.

          What does it tell us about the underlying property market?
          And guess who is big in Chinese real estate? ……drums….. The German landesbanks and sparkassen!

          Hola!

        • Nick Kelly says:

          See above.

    • That’s interesting, I wonder what Druckenmiller is doing? Then yesterday the US announced this new SE Asia alliance to protect the So Shyna Sea. The Fed could say something like, “if you don’t bail out foreign investors in Evergrande, small potatoes really, when they pull the rest of their money the pain will be a lot worse. “

      • Tanstaafl says:

        I think it’s a lose-lose-situation for China: Either pay hundreds of billions of dollars to the capitalist enemy across the pacific, dollars you need to conquer the world, or let an enormous part of your own economy go down the drain and risk some social unrest, at least some unemployment (and these juicy numbers about GDP and stock market growth).
        Normally one would say China is planing in decades or centuries, but with the head honcho in place for life, that time line is drastically reduced. One would thank [insert local deity here] for that.

        • sunny129 says:

          If I understand correctly most of the DEBT(s) from govt owned banks, businesses++ get re cycled every few year(s). Private and semi private enterpraises have same type of accounting! What’s capital ratio of those banks? apparently 100%nbacked by chinese govt?

          Has any one (3rd party) audited these firms? Even our so called 4 big firms are unreliable!

          Until we know who is pulling the levers, behind the curtain, irrespective of what Chinese Govt claims or publish!?

        • NoNothing says:

          If I were Xi, and I wanted to hammer my enemy again, I would investigate bailing out my own investors and companies (with some pain to teach them the dangers of over speculatin’), but I would let most of my foreign investors crash and burn. Wolf mentions in brief the exposure by foreign investors and China’s special abilities to cure its economy. If I were Xi and I thought this thing was truly Lehman-level and, with the West’s deep fragilities, could really further knee-cap the US and Europe after this long year+ of balance-sheet burning and societal division reaped from Covid— plus America’s disastrous conclusion to Afghanistan and the future geo-political implications . . . If you truly want to win, to eliminate the rival, it’s best to kick them when they’re down, repeatedly, delivering the most vicious kicks to the head and ribs. Xi has big plans. And China. BIG PLANS. When has the West EVER been more vulnerable? If I were Xi, I would strongly considering ‘Doing’ the West right now. And sit back and watch the implosion.

    • Djreef says:

      You need to go back and re-read the article.

      Th8is is beginning to feel like a black swan event in the making.

      • Wisdom Seeker says:

        And the next big question is what the Red Dragon will do with the Black Swan, differently this time than before?

        Wolf wrote: “When enough of these folks start protesting in Beijing because they lost oodles of money on some mass-scam they’d fallen for, including property investments, the government, fearing social unrest, steps in and takes care of it. That’s how it has done it in the past.”

        I’m not so sure that’s the new playbook. The government has a lot more tools available now and it can come down hard on anyone, including those with legitimate grievances, when it decides how to assign the embedded inevitable losses. And mass protesting isn’t as permissible as it was 2 years ago.

        • Thomas Roberts says:

          This is true,

          The CCP has total control of the country, now more than ever, because of technology. However, protests were only ever allowed, when they were against the “Two Minutes Hate” target (1984 reference). The Japanese are a common target. The police in China, only really care about things that effect themselves (the police department) and more importantly the CCP; the police in China, are very lax about alot of major crime if it doesn’t presently concern the CCP.

          Far more than anything else, the thing that scared the CCP the most about the last president was the attempt to ban CCP members and their families from America. The CCP members are most scared of each other and if they couldn’t emigrate to cozy western countries, they would by very scared, as the CCP members brutalize each other as a sport. The CCP controls most of the money and assets in China, there is of course, an upper middle class of not CCP members that would also be greatly effected by the collapse of the real estate market. If CCP members, couldn’t get their families outside China, most might become very meek in a ruled by staliin, kind of way.

          If most of the families of CCP members that emigrated, were forced to emigrate to non-western countries (which would deny the very top of the CCP, that staliin level of control) the countries that that they might emigrate to, like Russia, might try to use them to exert control over China and the CCP. That would be a very interesting situation. It’s also possible that the CCP, would try to create semi-autonomous zones in other countries, if banned from emigrating to the west. That leverage could still be used against them, in this situation. More realistically though, it would take alot of effort to get all western countries on board of banning CCP members and their families (also identifying them is an issue, preventing money from leaving China, in a way that CCP family members emigrating from China, arrive broke, is an option), the western countries might be spying on them though, to learn about exact situations occurring in China. So there are reasons to let CCP members families emigrate.

        • CCPBILL says:

          Mass protests are never permissible, remember Tiananmen Square? Han China is and always has been a brutal totalitarian state. The real question is: Which faction of the CCP do the bond issuers belong to: a) Xi or b) Jiang?

        • Thomas Roberts says:

          Evergrande belongs to the Jiang faction. This is a big part of the hesitation to bail them out.

  5. Island Teal says:

    Good article and great background on the problems with CCP funded businesses. Have you heard any of the chatter re connections to tether and crypto?

  6. Whatsthepoint says:

    I’m a total naif about China, but it sounds like they’re ‘nationalizing’ their property market….and the word ‘collateral ‘ jumped out….how many of those $ bonds are rehypothecated up the wazoo around the capitals of the world? Asking for a friend….

    • Lynn says:

      I’m naive when it comes to finance and what terms mean and what they actually mean in real life complications but this looks like a very good question; “how many of those $ bonds are rehypothecated up the wazoo around the capitals of the world? ”

      Personally I hope anything big invested in global and domestic RE implodes. Maybe there would be less ultra luxury cars sold, but then again, maybe there’d be less homeless all around the world.

      • Prince Gbanga says:

        “Rehypothecate” is the American translation of the British word “wank”.

      • Peanut Gallery says:

        I agree that RE should not be a speculative asset, and that homelessness should be addressed, but homelessness is far more than just a financial phenomenon. Lack of household formation and marriage is also a key component of homelessness. Most homeless are unmarried, unattached single men. I think there is a correlation.

        • Paddy says:

          How about speculation in food? Some years ago I was in the wholesale food distribution and one year, wheat went bonkers due to weather. Then the speculators, smelling an opportunity, stepped in and bought and sold and bought and sold huge lots of wheat, driving the prices even higher. The price for a cwt of wheat more than doubled that year. Moms and dads paid for those profits in their kid’s PB&J sammies.

          I thought it would be funny if everyone boycotted wheat products for a month or two and forced those speculators to take delivery of the wheat. What would a wall streeter do with 50 rail cars of white winter wheat anyway? Fire sale. Then they’d probably never touch it again. Not saying we need more gov’t controls, but there are things that make you scratch your head.

        • Peanut Gallery says:

          @Paddy

          Well, in reality… thanks to the government’s farmer subsidies, food is relatively cheap. If you look at trends over time, as a percentage of people’s incomes, food has become extremely cheap over time.

          I get that commodities have been speculated over for some time, but in reality, food is cheap to the average layman.

        • Lynn says:

          Yes, those are the statistics, but what they don’t catch are the sane working rural homeless, most of whom live in their cars or on couches and never go to shelters. They tend to stay away from homeless services and don’t get counted, but I’ve known many of them personally and volunteered at events with them. I’ve known several store clerks in town who would be mortified if anyone found out they were homeless. And would possibly lose their jobs.

          It kind of skews the data and the images.

      • COWG says:

        “ Maybe there would be less ultra luxury cars sold, but then again, maybe there’d be less homeless all around the world.”

        Noooo, don’t say that! I love buying 100k cars for 3-5k with 80-100k miles…great bargains with the caveat that you’re knowledgeable enough to stay out of the dealer for repairs… with proper care these cars will go 200k easily…

        Lynn,

        There is no cure for homelessness… you cannot relate how these people think relative to how you think… an exercise in futility and a waste of resources… not all, but many choose to live that way but they’ll cry a river for the tv… most are irresponsible and will never change… invite a homeless person to dinner and see what you get… an inventory of your house is what…

      • Nick Kelly says:

        ‘rehypothecated’ : it means to pledge the same collateral to more than one lender, typically without them knowing about it. So when the SHTF a bunch of lenders all try to seize the same asset. Then if it was part of THEIR asset base, which they may have also used to raise money, a cascade, chain reaction or domino effect can occur.

      • California Bob says:

        re: “… I’m naive when it comes to finance and what terms mean and what they actually mean in real life complications …”

        The Chinese will attack Taiwan in order to change the subject. That is a big complication for the US (and Japan, and Australia, and South Korea, and ?).

        • roddy6667 says:

          I think China will not have to use military power to get Taiwan back in the fold. Not that long ago, the public sentiment on unification vs independence was running about 45% vs. 55%. All the US has to do is make some screwup that offends Asian countries, and the next election will decide it.

        • Nick Kelly says:

          Was that ‘not long ago; before the crackdown in Hong Kong? Which also reneged on the CCP promise to allow HK a separate system.

        • California Bob says:

          I think the takeover and suppression of HK has changed ‘hearts and minds’ in Taiwan. My nephew is marrying a Taiwanese woman; they’re coming to visit in the fall. I’ll get her take (if it’s appropriate).

    • Zhao says:

      The US real estate market is already collateralized to the gills and nationalized by the Fed. That and insane interest rates support the perpetual real estate bubbles

  7. Nathan Dumbrowski says:

    If this does go belly up what is the closest equivalent here in the States? Seems like the risk and reward only getting more extreme. Honestly when people mention Million $USD that seems like they are a Ma and Pa operation. Real value begins in the Billion $USD. So insane that we can’t get excited unless a merger and acquisition is $10B+

    SMH

  8. Franz Beckenbauer says:

    Wolf,

    you are not asking the two trillion-dollar-questions:

    1. Why should the chinese bail out american investors who were stupid enough to pile their money into a corrupt mafia state run by commie thugs when US-China-relations are – at a scale of 1 to 10 – at minus 10 with china already flying warplanes over Taiwan and laughing all the way to the bank when taking over Baghram airfield in Afghanistan together with their new best friends in Russia ?

    2. Who will bail out the dollar bonds, given that the almighty chinese government cannot do one thing, and that is to print dollars ?

    The answer is, as Jeremy Irons said in “Margin call”:

    I don’t hear a thing. All i hear is – silence.

    This is it.

    Got gold ?

    • Winston says:

      “american investors who were stupid enough to pile their money into a corrupt mafia state run by commie thugs”

      Amen! If you haven’t, watch the 2018 documentary “The China Hustle” on Amazon. “From the producers of Enron: The Smartest Guys In The Room, a Wall Street heist story about Chinese companies, the US stock market and a still-unfolding financial crime so big, it has the power to affect all of our wallets.”

    • intosh says:

      “american investors who were stupid enough to pile their money into a corrupt mafia state run by commie thugs”

      You gotta forgive those investors — they’ve been investing in the local corrupt mafia state run by predatory capitalist thugs for years. For them, it’s just different venue but same game.

      • DawnsEarlyLight says:

        No reason to ‘forgive’ them. They will ‘earn’ their just rewards.

    • Michael Gorback says:

      Just because the bonds are denominated in dollars doesn’t mean US citizens were the buyers. Anyone with dollars could buy them, and the interest was paid out in dollars.

      China doesn’t need to print dollars. They have plenty of dollar reserves and if needed they could buy dollars.

      Interesting how the CCP is “cracking down” and “teaching a lesson”. IIRC, it wasn’t too long ago that real-estate speculation was going crazy, shady loans were made by the bushel, and the CCP turned a blind eye to the whole thing.

  9. LeClerc says:

    How did Evergrande spend $305 billion? Who has the money?

    • joe2 says:

      As I understand it you start to build a $100M complex with $1M in cash and $10M in financing. Assuming you will get more financing when you need it. And do that a lot.

      It’s like building in Cairo. If you drive through you see many many buildings of 1,2,or 3 stories with support columns or even just rebar sticking up. As it was explained to me, families just start building with what money they have and stop when it runs out. They save some more money and build some more. Difference is they don’t go into debt.

      • Nathan Dumbrowski says:

        Malaysia same thing. The taxi driver said “look at all these half completed multi-story buildings. These all started and convinced people to buy/invest and purchase a future unit. They took the money and ran.” He said it happens ALL THE TIME and people wouldn’t learn

  10. TimTim says:

    With the clamp down on media groups (narrative), fintech (alternatives to state controlled banks), Macau and crypto (getting money out of the country) is the CCP simply expecting economic meltdown and preparing for it.

    If they assume as near to total control now, maintain control through an impending crash, perhaps they feel they will be in the best position for any recovery that follows.

    A sort of beggar thy neighbor approach as less tightly controlled societies take a lot longer to sort themselves out.

  11. Glen says:

    China seems to remember something America has forgot. Unsuccessful businesses fail.

    In America, the Fed’s continued propping up of failed banks and businesses has resulted in a mockery of “the free market”.

    • Peanut Gallery says:

      Yep, like I said. I find it laughable that a centrally controlled economy of the CCP is allowing business failure and deleveraging, while we here in the US, purportedly the “greatest free market economy in history” won’t allow for the same.

      • COWG says:

        What I find is laughable is the bond holders throwing money at these guys with the “ reward but no risk “ attitude and now they they get to eat the risk with no reward…

        Damn the bad luck…

        They should have invested in Archegos…

        Oh wait…

      • Red says:

        Id say its China followed by Germany then the USA. Usa will fall another spot every 10 years.

        • Nick Kelly says:

          By any measure Germany is light years ahead of US. Japan is in many respects also.
          If Germany is screwed so is everyone.

    • Peanut Gallery says:

      I wonder if this will be a watershed moment, where communism shows that it has some sort of advantage vis a vis free market economies? It will be interesting to see if something like this creates a dent in history, where decades from now we look back and ask ourselves: was this the moment where communism and other centrally planned economies proved that they were less corrupt than free market democracies?

      It used to be that central planning was clearly inferior to free markets (USSR), but now I wonder??

      • Auldyin says:

        @PG
        In my study of coincidence-ology I new something bad would happen when Trump pulled the plug on Huawei a superb, unbeatable tech co. which I have used for 15yrs. All the poodle snap dogs lined up to follow suit.
        Nothing good for the West. has come out of China since. All coincidences, of course, chips? crackdowns? property?
        I think they always knew they would have to pull the rip cord some day and I think they decided on the ByeBye after Huawei. Eurasia is the new focus. Russia and China have been studying a separate internet with invited connections only. They really are sick of all the BS in the West. 4 brand new Chinese destroyers went for an international waters cruise round Alaska, how dare they! Only Nato is allowed to send a battle fleet to China.
        What puts the fear of sh** up me is, if the glorious ‘victors’ of Afghanistan are dumb enough to think they can take on Russia and China, suicide.
        An Aussi sub in 12years that’ll scare them almost as much as HMS Queen Target Practice.
        It should only be a joke but sadly there are ‘coots’ contemplating it.

      • Oliver Singer says:

        China is not a communist country. It is a fascist state by every single part of the term.

        • Nick Kelly says:

          ‘Communism is fascism’ Sontag

          Both attempt to absorb the individual’s mind via a Big Brother type truncation of thought.
          In both National Socialism and the Bolshevism there no such thing as objective truth. With the latter making more of an attempt at a theoretical foundation, it is easier to find statements that virtually say ‘reality is whatever serves the class struggle.’

        • Auldyin says:

          @OS
          I keep telling students and tourists that they shouldn’t be so prosperous and happy living in a fascist dictatorship but they just keep laughing at me.

      • NoNothing says:

        What I fail to understand is why so many people fail to understand CHINA IS NOT COMMUNIST. Just look at this quote by Wolf: “Remember that in China, people own apartments like Americans own stocks. So a wealthy household might own 20 or 50 or 100 apartments. Generally, they were new-builds when purchased, and aren’t finished inside, and aren’t rented out. They’re held for capital gains.” What part of the COMMUNIST MANIFESTO was that in? Because I missed it. It’s amazing people can include words like ‘Stock Market’ and ‘Capital Gains,’ etc in sentences including ‘Chinese Communist Party’. If there was any truth in advertising, the name would be ‘Chinese Fascist Party’, because that’s what it is. Supported by an authoritarian state.

    • kam says:

      If there was a “free market” it was bought out and became a monopoly via the Fed.
      You cannot have a “free market” when a Central Bank can print funds faster than you can earn them. And those Fed funds go to you larger competitor who buys you up and shuts you down.
      The U.S. is a mirage, a hustle.

      • intosh says:

        @kam

        “The U.S. is a mirage, a hustle.”

        Albeit in another context (Afghan war), I remember a line one veteran US soldier said (I paraphrase): “Our freedom is the freedom to pretend.”

  12. Álvaro (from Spain) says:

    China selling oil reserves! “Spare some change…?”

  13. TimTim says:

    Hi

    Wolf’s article. It was very good at giving me an outside view of that mess, I thought

    • TimTim says:

      Abengoa I mean, Alvaro

    • David Hall says:

      On 8/25/21 China Evergrande warned of an expected decreased profit due to declining property values and losses from a new energy vehicle venture (EV?). They sold shares of Hengten Networks Group Limited for a profit, offsetting near term losses.

  14. Kenny Logouts says:

    CCP sees houses for living in. Let’s speculators fingers get burnt?

    West sees housing for financialisation, free markets, yeah! but will bail it out ad infinitum.

    It’s an odd mixture of communism and capitalism.

    USA is capitalist on profit but socialist on loss.
    China is capitalist on profit and capitalist on loss?

  15. historicus says:

    Waiting for the economists who explain how debt creates economic activity.
    Central bankers have subsidized the creation of debt with fake interest rates…rates well below inflation, an unnatural state.

    • Wolf Richter says:

      historicus,

      Borrowing serves a big purpose in the economy. I borrow $100,000 to buy a piece of equipment, plus I borrow against my working capital line of credit to hire someone and pay their salary to handle the equipment, and eventually, after we get all the kinks worked out, they produce 1,000 widgets a day that I then can sell for a 20% profit margin. That adds to economic activity (jobs, investments, sales, etc.).

      The idea is that I use some of that 20% profit margin to pay down the debt, and pay the salary, taxes, the maintenance, etc., and that eventually, the earnings from production from that person and equipment pays off the debt.

      If I don’t have that profit margin, or if I used the profit margin for other stuff, such as pocketing the money, or blowing it on another project that then collapses, etc., when the debt comes due, I cannot pay it, and I need to borrow new money to pay off the old debt.

      That works for a while, but when something goes wrong, I cannot borrow new money to pay off the old debt, and then the whole calculus falls apart.

      There are two kinds of capital: equity capital (such as from retained earnings or invested capital) and debt capital (borrowed money = leverage). Debt capital needs to be handled with discipline. And obviously, that wasn’t the case here.

      When it’s easy to borrow money from eager investors and lenders — the scenario you pointed out — discipline is the first thing that goes out the window.

      • BuySome says:

        The only ape in the entire banana tree to exercise true self-discipline was Doctor Zaius. Perhaps it’s time to kick out all these damnable dirty-handed gorillas and have a few worthy old-minded and slow moving orangutans regulating the chimp’s flying trapeze act before they all hurt themselves. Take the compressors away from the paper markets and put the free air back into the gas stations where it might serve better as a safety net. That’s an investment that really does pay off.

      • excessivelyperky says:

        Yes, there are some people in the US who still use that method to finance their lifestyle (when they aren’t begging for money to support it from people who should really know better).

      • kenneth couesbouc says:

        Strange, I thought that an invested debt was part of the costs of production, whereas profits paid the interest.

        • Wolf Richter says:

          “whereas profits paid the interest”

          Nope. Operating cash flow pays the interest. What you have left over AFTER you pay the interest is profit.

  16. KJ says:

    Good article.

    Who are the largest foreign bond holders?

    I have not seen a single article mention the names of the banks or the amount they are holding.

    Possible you can shed light on this to see where the risk lies for major US/European banks and institutional investors?

    • Tom S. says:

      I don’t think it is known who owns the bonds. That’s part of why it’s a hot issue.

  17. oreducks says:

    I think the CCP sees the United States as a cautionary tale — a superpower rotting from the inside out, rife with moral hazard, governed by media-loving. re-election obsessed ideologs serving the interests of Financiers and Monopolists — and it’s determined not to follow in it’s foot steps.

    Creative destruction is painful in the short-term and necessary for long-term economic health. China won’t allow a total systemic collapse, but they will let many go down in flames to send a message.

    The CCP is not concerned about their re-election or campaign contributions. They can squeeze and punish the greedy speculators and disappear some executives.

    • intosh says:

      Agreed totally.

      In some ways, CCP is more determined in protecting the consumers than the US is. It is tearing down the walls of the high-tech monopolies; it is putting a stop on the “proper education for the highest bidders” trend by reining in on the private education and tutoring market, which has seen hyper growth, to the detriment of the public education system; it is clamping down on abuse to the gig economy workers.

    • Paddy Jim Baggot MD says:

      the ccp would sniff US is corrupt and rife with moral hazard
      true, but how quaint
      they are becoming mirror image

    • BuySome says:

      Sorry, Northern Fowl, messages don’t do squat. The US once, right or wrong, executed a married couple to send a message that no one would be allowed to get away with an act of treason. This allowed the government to hush-up just how bad the infiltration had become. And yet we’re in this mess today because of all the little joe’s of this nation who have been more than willing to sell out the public future for a short vacation beside the money pool. Are the Chinese really so dumb as to have not learned anything from our mistakes? Do not be surprised if they decide to clean house once again..it might hurt but they always come back. Time is a resource they have always had an abundance of.

      • Nick Kelly says:

        Long after the Rosenbergs were executed for passing nuclear secrets to the USSR, a least a million were killed in Mad Mao’s Cultural Revolution. More millions starved from massive interference in agriculture. You would think they might have learned from their Bolshevik heroes in Russia, who managed to produce Russia’s first real Asiatic-type famines.

        At least Stalin’s picture isn’t on the ruble.

      • joe2 says:

        Political house cleaning is one groups simple removable of an obstacle, and another group’s simple death.

  18. Michael Droy says:

    So I’m guessing here, but if the bond holders can’t access the underlying property directly and it all gets sold off to Chinese approved investors at rock bottom prices, the bondholders are going to get very very little back.

    Nasty for them. Can’t say I’m sorry.
    They should stick to US debt which doesn’t pay the same rates of interest and….. well may be not.

  19. YuShan says:

    Moral hazard has created extreme fragility since the 2008 crisis. And in the West since the pandemic, it is not only a side effect but a deliberate strategy. Create “growth” now in exchange for a massive crisis later.

    Policy makers have no skin in the game. They win whatever the outcome. They become either rich or filthy rich. This always leads to bad outcomes. And the bad outcome is long overdue already.

    Regarding China, most people see China as a manufacturing powerhouse. But most “growth” has always come from building stuff, financed with massive debt. It is very interesting to see China cracking down on that now.

    Should things spiral out of control, they will attack Taiwan as a distraction and the government will find the population back at their side instantly.

    • MarkinSF says:

      So if things spiral out of control here will we attack China? So that the population will come back to the side of our government? Logistically things are pretty much in place for such an event.

      • Augustus Frost says:

        I wouldn’t put anything past insane US foreign policy. For starters, those who seem to ignore that Russia still has plenty of nuclear weapons even though the Cold War is (supposedly) over. Dip $hits, the weapons didn’t just disappear and all of it certainly wasn’t destroyed.

        Up to this point, US belligerent foreign policy has gotten away with attacking other countries with impunity and no “blowback”. That’s not going to happen with China.

        The US cannot “win” a conventional war with China on their home turf or in their backyard. “Best” outcome is a stalemate.

        Any attempt to do so would require a full military mobilization creating shortages and much worse inflation than now. It’s go nuclear or go home.

        • sunny129 says:

          The future war if there is one, will start with cyber attacks on various grids controlling our energy, communications, stock exchanges, airline service, water plants etc!

          They can cripple USA’s economy without firing a shot!

    • Auldyin says:

      @YS
      China and Taiwan have very close commercial links, an attack by either party would be self destructive, only outsiders could win by weakening both. Neither is stupid enough to fall for that. The aircraft activity is in response to a battle fleet which Nato has sent to China’s waters. Only UK and Aus actually put their names on the project with US.
      S. Korea, Japan, NZ, S E Asia all bailed, that should tell you something, the old way of business no longer works.

      • YuShan says:

        China will avoid (if they can) any large scale destructive attack. They will likely overwhelm the Taiwanese using thousands of civilian ships that cannot be shot at. And they will wear out the Taiwanese air force hardware with continuous incursions into (or near) their airspace. In fact, they have been doing this for some time now but have been ramping this up in the past year.

        Taiwan’s strategy is to delay the Chinese long enough till the Americans come to the rescue. But if it turns out that America won’t risk World War III over Taiwan (highly likely), the Taiwanese will give up because they can never win.

        China’s big gamble is that America won’t be willing to pay the price. But even IF America joins this war, America will lose. Politically, America can’t afford to lose a carrier or a few thousand man. But for China it doesn’t matter if they incur high losses. They will never give up because they see it as their territory and almost the entire Chinese population sees it that way.

        • Akakai Akakaikovitch says:

          The East values human life in a different way than the West. It has been said that the only reason WWII was won was because the Russians were willing to have 22-28 million casualties fighting the Germans. (No one knows for sure the exact number because not even they were counting.) US casualties in European theater were ~ 600,000.

          Chinese leaders would not care how many casualties there were, they have too many people already.

        • joe2 says:

          Yes that is the classical view. But for Chinese that pride themselves on strategy and asymmetric tactics, I don’t hear about novel counter asymmetric defenses. Maybe for obvious reasons, but the CCP snake has a very small head. I did not find that people I met in China particularly liked their rulers although they were nationalistic. If not directly impacted, most did not care who was in charge. Repressed minority areas were a different story.

        • Auldyin says:

          @Y
          Why does it have to be war?
          That is the US way of doing business, Imperialism.
          The Chinese suffered under that for centuries, that was how they ‘lost’ Taiwan and Hong Kong in the first place.
          They just want to reunite their country peacefully. The Taiwanese are dna Chinese, so why on earth would they see a connection with western ways as more compelling than a connection with eastern ways?
          All people everywhere mainly despise their leaders, it’s a function of being told what to do, like by teachers. Individual freedom is a trade-off for order.
          If China prospers and Taiwan prospers they will just move closer and closer on everything, that’s what makes ‘just business’ the most effective way to work.

        • jm says:

          @Akakai Akakaikovitch:
          Hitler intended that all the Soviet citizens on land not attractive to the Germans who were not temporily useful as slaves would be killed ASAP so no resources would be “wasted” on them, and that the slaves would die when no longer useful, and all the Soviet Union land so ethnically cleansed would be turned over to Germans. So however many died fighting the Nazis and their allies, had the defense been unsuccessful far more would have died. If you know you’ll be killed if you don’t fight back, fighting back is the only logical choice, not a noteworthily courageous act.

        • Auldyin says:

          Please read the history of the second world war from the Russian point of view.
          It does great disservice to heroes to suggest that they were cannon fodder of ruthless rulers. Some Generals were and are idolised.
          Just sayin’

  20. Mark says:

    “In other words, the government controls the money, the lenders, the borrowers, the buyers, the markets, and the message.”

    ???? I thought this article was about China ?

  21. CJH says:

    China sold debt denominated in dollars? Why would China do that? It is a monetary sovereign nation. And the crypto blossom is poisonous for any nation to inhale. China should simply let the bankrupt corporations shrink or die altogether. Then re-liquify those industries without creating debt. As for crypto, those who are laundering legitimate money via crypto should be sent to prison. Permanently.

    • Wolf Richter says:

      “China sold debt denominated in dollars?”

      Yes, the Chinese government also sold dollar bonds (borrows in dollars), perhaps mainly to create a dollar credit market in China. China doesn’t really need dollars. It’s awash in dollars. But that’s a separate deal.

      Here, COMPANIES sold dollar bonds. That’s very different from the state selling dollar bonds.

    • YuShan says:

      One reason a lot of lending in China is in US$ is because of restrictions in Chinese yuan. As you know, it is not a free currency, so you can avoid regulations that apply to yuan. In addition to that, US$ interest rates are lower and with the yuan loosely pegged to the US$ the exchange risk is perceived to be relatively low.

  22. Brant Lee says:

    Aren’t U.S. banks invested deeply into the Chinese glory boom since there is so much action moved to China, nothing at home? The Chinese know the interests of the Feds pet banks will be supported. Look for Chinese bad debt on the Fed balance sheet soon.

    • Peanut Gallery says:

      How would the Fed be able to put chinese debt on their balance sheet? Isn’t that outside their charter? Not that they ever followed their own charter…

  23. Tom Stone says:

    It’s one heck of a show already and these are just the opening acts.

  24. Anil says:

    Wolf Richter specific emphasis is the contagion effect on bond’s of other developers once confidence is dented with the biggest player? Empirically this is inevitable causing an “implosion” within china’s financial market.
    Savvy Foreign bond holders would have factored this matrix when buying bonds? BOC may never allow such a calamity?

  25. Xavier Caveat says:

    The thing about kvetching in regards to China, is 20 minutes later you’re hungry to do it again.

    The main thing between the USA & China, is one country has peaked and is on the downside, while the other seems confident of its future and has made great strides in getting there.

    • BuySome says:

      China has an endless series of futures. They could lose 90% of the population and yet come back. It would still be China as it has been for eons. But the new world nations have not been around long enough to prove they know who and what they are. It was all built at a very high cost and we’ve already come to a point of forgetting why it was all done. This is what gives China the upper hand today. It doesn’t guarantee they’ll have it tomorrow…the ball’s in play and it matters what we decide to do in response to their approach. Game ain’t over, just early rounds where we let benchwarmers on the field. Tossing the entire coaching crew might be ahead.

      • Augustus Frost says:

        One of the biggest differences seems to be that Chinese elites aren’t intentionally self-destructing their own culture and gutting their economy. The leaders may not care about the population, but they aren’t doing that.

        Western (European) culture is being destroyed intentionally. Not aware of a single instance where that ever happened. It’s not fully evident yet because the asset mania, loosest credit conditions in history, and fake economy have disguised much of it.

        The economic and societal fundamentals might be better than I believe, but both are a lot worse than the vast majority of the population thinks.

        • Nick Kelly says:

          The Chinese expansion of credit after 2008 was the largest in history. The Evergrande debacle is an example.

        • Lynn says:

          Well, it’s not a very polite thing to say, but there was a lot of book and temple burning.. And cultural replacement. And a lot of intellectuals went into hiding. I think both have destroyed some of their own cultures, just in different ways and maybe for different reasons.

        • joe2 says:

          “intentionally self-destructing their own culture … but they aren’t doing that.”

          Because they already did it.

          The damage from the Red Guards and the Great Leap Forward are evident all over the country in destroyed Buddhist temples and historic areas and artifacts. They were trying to rebuild a lot of that when I was there mainly for domestic tourism.

          The one child policy was another punch to Confucianism.

          And destruction of religion and persecution of Falun Gong and the Uyghurs is still ongoing.

          But I see your point on cultural destruction in the US and Europe. Maybe it’s all just part of the nature of man.

  26. Steve says:

    Evergrande is only a $305 Billion problem. Small potatoes.

    China, like the USA can “print” as much currency to cover the default.

    The ponzi scheme will continue, until it doesn’t.

  27. Steve says:

    Is $305 small potatoes ?
    Is Evergrand the Canary in a Coal Mine ?
    Don’t have a crystal ball.
    But I do know, debt has gone parabolic, Fiat Currencies are out of control.
    Most know, this will not End Well…………..The timing is everything.

    • BuySome says:

      Oddly enough, no one is running down the street throwing cash into the air. It the electric widgets which are out of control, which is why they are pushing to get everyone off of the cash economy…not for your convenience. There is nothing to stop a government in trouble from setting a limit on how much you can get out before they reset the exchange rate at 10 electrons for every paper banana. They can’t outright destroy the currency because of the risk of civil war, but they can bend the game very easily. In the US, the Public Welfare clause is a catch-all which ensures a way out while protecting the basic structure of the republic. If need be, it can be used to negate most of the legal mumbo-jumbo that you think is a protection while keeping the money system in place just enough to ensure almost no one fights back. When it comes to choice between injury or death, few will fall back on principles. The governments know this.

  28. Putter says:

    First cockroach sighting. Never just one. Real estate bubble is world wide. Roaches will be appearing everywhere!

    • Xavier Caveat says:

      “Roaches will be appearing everywhere!”

      Don’t bogart that joint, China.

  29. Eastern Bunny says:

    How is the Fed buying 40billions of MBS per month different from government of China bailing out Evergrande ?
    There is more capitalism in China than here.
    And if they let them go bust , I am putting all my money on the CCP.
    We have some real issues here with the marxists getting in charge in most sectors of our society.

    • phoenix says:

      “Marxists” you have no clue what that word actually means. There are no marxists in charge anywhere in our society. Stop being hyperbolic

  30. Citizen AllenM says:

    Now, if one is a wise and inscrutable Chinese socialist one could do thus: Allow massive overbuilding by nascent capitalists, then even more huge construction funded by foreign devils. Allow it to go on longer than you can imagine. Now, the controlled demolition drops the market to 10% of the value, and there are few private buyers. Now, you can buy all of those huge apartment blocks for 15%, and then rent them to good socialist workers with high CCP numbers.

    Lather, rinse, repeat.

    It works in so many ways if the government is not owned by Blackrock.

    Someday this war’s gonna end…

    • Nick Kelly says:

      The CCP are the nascent capitalists. The banks that lent to EG will largely be SOEs. Most of the wealthy and influential in China are CCP members.

      Half the wealth in China is in RE.

    • Franz Beckenbauer says:

      You don’t have a clue.

      In China, everything belongs to the state. People don’t “buy” real estate, they only lease it.

      So why should the socialists buy something they already own ?

      • Michael Gorback says:

        You lease your real estate from the government. It’s called “property taxes”. Try not paying your rent and see what happens to “your” property.
        A lot of people rent their property from the HOA. Try not paying your rent to the HOA.

        • BuySome says:

          MG understands what few seem to get. The last private lands were granted by the British King, and you could only hang on to those by agreeing to play by the new rules, i.e. taxing authority of the common state. All other lands since were part of the public pool, to be distributed in the new way….partial payment up front, taxes unto infinity. And they can always get it back earlier if it suits the public need more than your private activity benefits the general welfare of the nation. That ain’t communism…it’s a damn Republic, like it or not!

        • Nick Kelly says:

          If you don’t mind living in the bush your taxes will be minimal. If you want roads, bridges, water, sewer, police, etc. you will pay a property tax. Even if you don’t want those at home at some point you will most likely use a highway. Then there is knowing you aren’t going to be invaded by a foreign country.

          BTW: in beginners’ RE law they try to explain the diff between absolute chattel ownership, as of a car, and RE, which gives you a ‘bundle of rights’. You are WAY safer with this today than receiving land from the English King, who was known to CHANGE HIS MIND. Or be overthrown. After the English Wars of the Roses, a third of the estates changed hands.

          There is a striking photo demonstrating this. In NY (?) the land assembly for a high rise could not get one small plot with a shack on it. So they had to build around it. This was a while back so may be gone now but the shack had frontage on the main drag.
          This would never happen in China and likely not in a country without law based on English law.

          It was a bit sad hearing Prof Dershowitz explain Habeas Corpus as a ‘a feature of the US Constitution’.
          That document was written yesterday compared to Habeas.

          Dersh: why is it in Latin?

        • Wolf Richter says:

          For your amusement, google the phrase: chinese nail house

          I know it’s different. But each country has its own unique problems with real estate development.

        • Old School says:

          I don’t have too much problem with property taxes as they are for local services and you can choose a property type and location that suits your needs. If you are paying $20,000 in property taxes and your local government is funding six figure pensions you got to vote with your feet.

    • Auldyin says:

      @CAM
      So the owners are going to take all their property back from China!
      Nope!
      The paper will be argued over in court for years but, at the end of the day when all is said and done, there will still be 1000’s of new properties in China. That’s how it works, paper is paper, real stuff is real stuff, the clever guys end up with the real stuff.
      Just sayin’

    • Lynn says:

      They don’t really need more apartment blocks. Look up “ghost cities”. They are whole cities that are virtually empty- just investment vehicles. There’s a couple guys on you tube that give a gritty ground level guided tour through 2 of them.

  31. MiTurn says:

    “When enough of these folks start protesting in Beijing because they lost oodles of money on some mass-scam they’d fallen for…fearing social unrest,[Beijing] steps in and takes care of it. That’s how it has done it in the past. And the holders of dollar bonds have been counting on it.”

    Has Beijing hit the wall? Or letting nature takes its course?

    (Thanks again, Wolf, for giving a transcript of your podcast. Helps us hard-of-hearing folks!)

  32. A says:

    Nations are most likely to start a war when they need to distract their populations from economic collapse on the home front.

    The world needs to be at high alert for China doing something very stupid in the next few years like invading Taiwan.

    • Auldyin says:

      @A
      I believe the next 5year plan is to expand the middle class to buy all the high value products that would have gone to export in previous years. Every action is carefully game-planned for years in advance, that’s what all these seried ranks of party members do.
      Just like your Congress, Senate and Administration does.

  33. Bobber says:

    Next week, are US investors going to get a recorded message from Xi Jinping saying “You no longer own bonds in Evergrande, good bye”.

    • Boomer says:

      Reply … sorry China you lost $305 Billion in Dollar denominated US Treasuries.

  34. What does housing supply look like? I guess what passes for dissent in China is a whispering campaign. Its okay to execute a corrupt CEO but you start disappearing middle class citizens with bread and butter complaints, the revolution isn’t far behind.

    • Lynn says:

      I wonder if this is key. China has plenty of housing- much of it is empty. There are entire cities with virtually no residents- the housing units are investment vehicles only. The prices can be outrageous. Look up “ghost cities”. There’s a couple guys on you tube that give a gritty ground level guided tour on motorcycles through 2 of them. You may or may not like where they are coming from, but they do give a run down on why it’s such a big deal- it’s one of the few investments families can make in the hopes of becoming rich.

      The thing is, even though it’s been accepted for a long time I would think it has to be a sticky political issue for a communist ideology. There may well be some resentment from middle and working class citizens because of RE prices. God knows there is in other countries..

  35. GSH says:

    Who owns the $300B of mostly worthless dollar denominated loans? How much leverage was applied in purchasing them?

    If they are hidden in some pension fund, fine. If they were bought at 10x leverage by our real/shadow banks, something is going to give. Soon. The Lehman #2 moment may not be in China.

    • Bobber says:

      There’s no reason to leverage bonds paying 10% interest. You leverage bonds paying 1% interest.

      • GSH says:

        The big boys leverage everything. Why wouldn’t they. If 10% is good, 100% is definitely better.

  36. gorbachev says:

    I wonder if this will affect the world financial
    markets.Are the defaults large enough.

  37. Phoneix_Ikki says:

    Burn baby burn! Hopefully this will be one of the pin that prick the global bubble so we can get some kind of price adjustment on asset around the world. Perhaps wishful thinking but hard to see how the Chinese government wouldn’t just pour infinity amount of money to save face and stop the massive domino effect that it will create.

    Another wishful thinking but if this thing does blow up and cause the next financial meltdown. Maybe there’s a slight chance that it will force all these investors with foreign assets like US houses to liquidate and maybe that will crash our housing market…one can only dream of that to happen.

  38. Phoneix_Ikki says:

    10000% agree with the CCP on this one, unfortunately this is probably the only thing I agree with the CCP on it, that’s assuming they are actually sticking to it and mean what they say..

    “housing is for living, not for speculation.”

  39. MonkeyBusiness says:

    The first thing the Chinese government should do is seize money from the billionaire owner (current wealth estimated at around 10 billion dollars). Unlike this country where companies can go bankrupt while still leaving the CEOs/previous owners super rich, the Chinese government should not have any issue exacting payments from whoever made this mess including upper management.

    10 billion might be a drop in the ocean compared to 300 billion, but the company should have assets as well. Investors should be wiped out, but a lot of people who put down money on homes can be made whole with 10 billion dollars.

  40. Chauncey Gardiner says:

    Besides bond investors and shadow banks, Evergrande debt and that of other Chinese property developers is reportedly held by banks across China, Asia, U.S., Canada, UK, and Australia. The question is to what extent there could be contagion in a highly debt-levered system — both internally with suppliers, contractors and other real estate developers within China — and internationally through the networked global banking system. Think it’s still most likely that the PBC and government will act to prevent a quick dissolution of Evergrande and the systemic effects of default. Suspect they will instead opt for a long-term workout, which has its own social costs and economic issues, as we ourselves have seen post-Lehman under “Capitalism with American characteristics” as other readers noted above.

  41. Citizen AllenM says:

    I think property in China will once again be perilous to speculate in, as the CCP has basically said” The party is over, let the hangover begin!” with the statement that housing is for living in, not speculating in!

    The concept of alligator from the late 1970s comes straight to mind…which of course could never happen again- after all wages are rising faster than inflation, so those miraculous hugely paid folks can rent those palaces here in California without resorting to packing the bedrooms….

    Plus ca change. NOTHING DOWN will make a comeback as real estate starts eating capital like bon bons.

    Guess everyone forgot some of those lessons from the 80s, which comes right after the huge inflationary spirals….

    And given the levels of debt involved in real estate, whosh is a sound of equity vanishing with the buyer’s frenzy.

    Say it loud and proud, leverage kills in a down market.

    Someday this war’s gonna end….

  42. Citizen AllenM says:

    Now, everywhere flush with Chinese “inwestments” should be getting nervous, because those margin calls will have no mercy, or they may all just” try to get on the last plane to Vancouver with their millions before they get sent down to the farm….

    A small committee runs China, and the funny part is they don’t care about money, not one whit, and so to think it is run like America is to make a giant mistake.

    Any billionaire who gets outta line will quickly find that questions about how they got so rich are being asked, and that billion or million can vanish with the smile of a gray bureaucrat.

    Disruption is upon us, and notice how the metals markets went splat- too much gearing baby, the pedals are too tall!!!

    Now comes 2008 to people who don’t care if the rich go broke. At all. And small investors can get screwed too, because they are “capitalist roaders”. Safety will consist of a modest bank account at the People’s Bank, and that condo in Vancouver might as well be on teh moon….

    So much grief because “change is impossible”, but nope, just incredibly painful.

    And in this case, until the mandate of heaven is shaken, meh. And a lot of poor Chinese who can’t afford housing will applaud cheaper digs.

    Someday this war’s gonna end….

  43. Michael Gorback says:

    I don’t know why people think China is the next economic superpower. They’ve made one bonehead mistake after another. How many millions died of starvation under Mao?

    Now the CCP is uprooting the corruption that it tolerated while things were going well.

    It’s also a fragmented country that’s difficult to govern. Can you imagine Americans demonstrating over this? In China the employees and home buyers are hitting the streets.

    My bet is on India.

    • jon says:

      I am curious about your thoughts on India as I am from India originally.
      Indian Govt has made sure that the poor people are given free food, free medical services, free school, free phone/laptop /bicycle to some extent.

      My dad needs labors to work in his farm their but he finds it very difficult to find as poor people don’t really want to do far hard work and basic needs are fulfilled by govt dole.

    • Petunia says:

      India’s govt is nationalizing farmland owned for generations and giving it to large businesses. The only thing global is governmental thievery.

      • jon says:

        From my limited knowledge, this is not true.
        Large businesses are buying farmlands from farmers at sky rocketing price. Farmers make more money by selling the land, putting the money/proceeds in CD ( 6-7% yield ) then dong actual farming..

        • Petunia says:

          I heard it on a podcast, an Indian guy called in from India to discuss what’s been going on since the lock downs there. They also posted articles from India reporting on the protests over this practice. Lots of protest over all kinds of farming issues there.

    • MonkeyBusiness says:

      India? ROFL
      1. Caste system. Fragmentation from birth. Might actually be a plus for someone from the US since people here also love class divisions.
      2. No real national language. Hindi is only spoken by 46.xx% by the population.
      3. North South divide culture wise.
      4. Super corrupt. Ruled by billionaires, but for a US person, that’s probably utopia. Read “The Billionaire Raj” for details.
      5. Climate change will hit India super hard.

      • MonkeyBusiness says:

        Oh don’t forget the always simmering Hindu/Islam conflict.

        • Pot Calling the Kettle Black says:

          India with a population of 1.4 billion, there are bound to be conflicts, differences.., but from inception, it has been democratic with the defeated party handing over the power to the victor. Nowadays, journalists in US are asking the candidates whether they will accept the electoral defeat or relinquish power! Most red states have restricted the rights of general public to vote.

          Yes, there are communal conflicts, so does USA with their white vs black, black vs legal institutions, proudboys, white supremacists and other Capitol climbing monkeys! No such incidence in India, where defeated party members climbed the Parliament to avoid relinquishing their seat of power.

          With California burning on a regular basis, unprecedented water crisis in the West, growing ghost forests in the East, it’s really funny (or sad) to see your comments on climate change. You fail to understand that we are sailing in the same boat. It doesn’t matter where the hole pops up!

      • jon says:

        You got it partially right , coming from someone who grew up in India and still visits India every year.

        #1 is not really relevant now a days from my perspective.
        #2: True but again does not matter. English is the common language.
        #3: There is north south east west but no division which may cause existential crisis.
        #4: 100% agree. But isn’t USA so ? Difference between corruption in USA and India is: USA has legalized corruption but in India it is under the table/covert. One example of legalized corruption: Lobbying.
        5: Don’t know that, guess, it’d hit hard all over the world.

        • MonkeyBusiness says:

          Jon,

          #1. As you said, you grew up in the US. And visiting a certain place is quite different from living there full time. India is also a huge country. As someone who works in IT, naturally I have a lot of Indian friends including people from the Dalit caste. Some of them told me they will never work for companies whose CEO is an Indian, echoing what someone said in Bloomberg’s How Big Tech Is Importing India’s Caste Legacy to Silicon Valley.

          #2. OP (Original Poster) was making a comparison China vs India. China does not need English as a common language domestically. Heck people will think you are showing off if you use English in day to day conversations. The fact that you need a language from another land to “unite” people however points that there’s fundamental differences within the country that can not be bridged by local culture/language/etc.

          #3. I never said anything about existential crisis. OP however said that China is hard to govern. My point is there’s regional differences in India that also makes it hard to govern. What works in Uttar Pradesh might not work in Tamil Nadu. China has regional differences too.

          #5. Oh no doubt climate change will hit the entire world super hard, but some countries will be hit harder than others.

        • jon says:

          First 30 years of my life, I spent in India.

      • Akakai Akakaikovitch says:

        There was a New Yorker article of some years back about a massive amount of gold being found in a Hindu temple after opening several secret rooms. Valued at $2 billion when gold was I believe at $1300/oz. The temple’s god had legal status as a minor and so had a guardian appointed to safeguard the gold.

        People interviewed said that rather than see the asset used to build local hospitals, schools, parks etc. it should stay locked up or it would all be bled away to corruption as soon as it was converted to currency.

        It would be a mistake to think Americans can understand India any more than say, Vietnam, Iraq, Afghanistan . . . .

    • Tom Pfotzer says:

      I’ll take China on this one. Nothing makes a good race like a difference of opinion.

      China has made a lot of really good decisions.

      They are learning a great deal from us.

      They have a rather different culture, one that can do a Long March, they have Sun Tzu. Lao Tse.

      Here’s one from Lao Tse:

      “Knowing others is intelligence;
      knowing yourself is true wisdom.
      Mastering others is strength;
      mastering yourself is true power.”

      Mastering yourself is true power.

      The Chinese have a great deal of cultural depth to draw upon.

      China is doing some housecleaning, and all the right things are showing up in the dumpster.

      Nobody has ever lifted more people out of poverty in less time than China.

      • Tom Pfotzer says:

        I’ll hasten to add that there’s a lot to like about India, too. Wouldn’t bother me a bit if they win the race.

      • MonkeyBusiness says:

        3000 plus years of history. The United States is just a child compared to China. Heck, I am betting we’ll split up first before they do.

    • Red says:

      They already are the main superpower. The only question is how fast they pass the US in the dust. The only thing the US has on China which is not a positive thing is an albatross of military spending aka Russia before it went bankrupt.

    • Nick Kelly says:

      And India isn’t fragmented?

    • Auldyin says:

      @MG
      All I know about India is that bureaucracy is a cherished cultural art-form. Always felt that was all I needed to know really.

  44. doug says:

    I read somewhere about for China as a developing nation, the question was: when to clamp down. Too soon, and you stifle innovation. Too late, and you have monopolies ruling the govt. It is all about timing.

  45. SocalJim says:

    Nothing to see here. In the event that the firm fails, the FED and other central banks will flood the market with liquidity. Hard assets are the place to be.

  46. gametv says:

    It seems to me that China is smartly de-leveraging and reducing risk in the financial sector, in preparation for a global de-leveraging/collapse.

    I think China will emerge much stronger than Western nations because Western government is so corrupt and the voting population has become so greedy and short-sighted that they refuse to deal with reality.

    In my estimation, it all falls apart right around the time of the debt ceiling increase. Just a few more weeks to go. If not then, I would say January of 2022.

    The momentum traders that have fueled this stock market and real estate boom will soon be out of ammo and it is impossible for the Fed to step in with rampant inflation.

    • JohnP says:

      Agreed. China’s crackdown on their tech industry seems to also stem from the same long-game strategy – clear out some deadweight, deflate the bubble a bit so that their economy stands a greater chance of emerging ahead of their geopolitical rivals during the next shit-hits-fan event.

      Small wildfires are a natural and necessary part of a healthy ecosystem. They clear out the undergrowth. Suppressing small wildfires just means an inevitable giant wildfire that decimates everything – the undergrowth, the trees, and it sterilizes the soil rendering a crippled ecosystem. Same principle applies to the markets.

      • Happy1 says:

        The property bubble in China is so much larger than any bubble in the US that it’s laughable anyone would think their government us “wise”. If they were, this would have been addressed 20 years ago. They have no property tax and the average investor knows that anything but real property is at the complete whim of a totalitarian government that starved 80 million people in the 50s and destroyed a generation of its best and brightest in the 60s. Anyone with any sense in China buys overseas property and assets.

        And the crackdown on tech and private business and entertainment is just as stupid and counterproductive. They are jealous of the influence of popular entertainers and charismatic tech moguls and afraid that Ant might eat away at the state banks. These are not the actions of wise people, they are the actions of power made paranoid people.

        • Nick Kelly says:

          Agree. And all the comments re: ‘this is just one company, no big deal, no contagion etc. are nuts. Half the Chinese economy is RE and its bubble is bursting. Many RE developers are losing share price as the EG debacle nears the edge. If all EG’s stuff gets thrown on the market, all RE falls in value, lowering the value of any mortgage-like financing.

          And no, this is not a cunning plot by the CCP to re-discover socialism. They may try to paint it that way, but they did not plan on this. It is now their biggest problem.

    • Auldyin says:

      @gtv
      You’ve been reading the Chinese Army General’s theory of Economic Imperialism. Check out Alistair Macleod at Goldmoney.com

  47. Bull&Bear says:

    Looks like Evergrande wanted to borrow and grow indefinitely just as Federal Government and it’s GDP do… This won’t happen.

  48. Auldyin says:

    Stonking article and comments ,W
    Can’t help but think of UK railway mania days when screwed investors took liens and nailed them onto any assets they could get to first before the mob.
    I don’t know if I’m in this but I’ve got an international fund which has been a bummer for a couple of weeks, I’ll have to run an audit to see. Usually my guys are good at avoiding dumb, but that Ping an seems to ring a bell which I don’t like.
    Cheers

  49. Mark says:

    I read this to see which foreign banks would be named. You can bet that goldman and DB bank are somehow involved. Along with most of the others. If there were dollar based loans they must be.

    This is where bailouts will be pointed. The fed never lets their friends take a loss.

    • Mira says:

      In the not to distant future it may come to this
      “They are our friends.”
      “They are long time friends, friends, amici, freund, you know, pals.”
      “It is a machine man, it has no idea.”
      “You have to bail them out.” he shouts as he kicks the AI machine.

  50. #42 says:

    $CQQQ hasn’t preformed so well lately. Happy to say I got out @$108 :) Deleveraging from phantom-real-estate, if it is in the cards, why not virtue-signal (CCP) on the way down?

  51. IronForge says:

    Thank you, Mister Richter:

    The Best Assessment on Evergrande+Industry thus far.

    Sites like ZH have been taken over by FalunGong/EpochTimes Sources that only Shovel Out the Doomsday-in-All-of-China-the-Evil-Empire Articles.

    • Nick Kelly says:

      Don’t forget the Russian govt footprints: ‘South Front’ and the ‘Strategic Culture Foundation’. The latter name virtually announces it’s a con.

  52. Nik says:

    Wowie….how Surprising the Communist Banking System-State will survive…at of course,the expense of investors, no mater where in the world those investments originated. Emulating western banking/financial ‘hocus-pocus’..is a far cry from the penalties of duplication…lolol

    • Mira says:

      “No matter from where in the world the come .. we need them .. no players .. no game.”
      Maybe some of the rules are being changed to accommodate new zing .. pizazz & oomph ??
      Too bad your not an honoured guest .. is all.

      • Mira says:

        We could ask Mister Richter to imagine how these new aspects might manifest.

        • Mira says:

          What if .. Miser Richter ??

        • Mira says:

          If the Australian government was happy to let go of superannuation .. “The money is not worth the effort” ..
          What next ??
          Property investment is safe .. bricks & mortar are always a good investment .. “We own it all .. will not sink”
          “How much do you want?”
          He can type 60 words a minute & digits even faster.
          I do not believe that you do not have a fertile imagination Mister Richter.

  53. Mojer says:

    All I understand from this article by Wolf is that Evergrande has a problem of dollars not in Renminbi, so those who hold these bonds now have a serious problem are the Western and possibly Arab countries and not China which has the property built on its China soil.

    • Wolf Richter says:

      It’s an even bigger problem in RMB. But that wasn’t the focus of the article.

    • Nick Kelly says:

      I think the largest problem for the Chinese govt is that well over a million people have paid large down payments on condos. The bonds aren’t even due, they are trading at 30% (at last look) but they aren’t due. The immediate problem is that EG is completely out of cash. It can’t pay workers and owes suppliers of everything who now have cut EG off.

      A gov take over would be great for the condo owners, but it transfers the problem and expense to the govt, just as it is trying to taper its exposure.

      • Nick Kelly says:

        Sorry: bond interest of 84 million US is due Sept 23, but the worst thing is if guys stop work cuz no pay.

  54. Sam says:

    This whole Evergrande thing was just a matter of time. The only real estate my wife and I ever owned, invested in is our modest home here in Canada. The whole policies of most central banks worldwide keeping interest rates low since 2008 crash smells of desperation of economies worldwide not working the way it should be.

    They don’t want higher wages, benefits for most private sector working people unlike most employed by government have unions that protected them with much higher wages, benefits than the private sector. The economy suffers because people can’t afford homes, decent place to live etc. so they have to keep interest rates low. We then see these financial, economic blowups that are encouraged and propped up by speculation and debt, leveraged by these ridiculous low real negative interest rates(inflation higher than interest rates).

    This is why we would never risk our money in anything that we don’t know who and why it is doing with it. We paid off our house in 14 years. We never had any debt after that now 20 years. We don’t buy any real estate investments or anything else especially with high debt associated with it.

    We just keep buying our 5 to 10 year GIC’s, term deposits within CDIC and other deposit insurance limits. At least now, we are finding 2.5% to 2.6% to replace our maturing GIC’s, RRSP’s. I don’t know how credible this info i got from my friend who is a GIC junkie continuously looking at GIC rates, GIC rate specials but he sees a 2.88% 5 year GIC promo from a Canadian bank here in the next week. We will see. We always tried to live within our means, save minimum 15% to 20% of net income and maxout our RRSP’s, RRSP tax refunds, GIC’s now TFSA’s since 2009. We have exceeded, accomplished our goal of having at least 70% of our pre retirement, our employment income which is $75,000 a year. This consists of $37,000 from our CPP, OAS pensions and $23,000 from our RRSP, TFSA, GIC interest. We are debt free and our retirement income of $60,000 a year covers our current expenses, taxes by 2 to 1, $30,000 a year versus $60,000.

    We have no sympathy and understanding when people take high risks and debt to try to make a lot of money when it is a big gamble even if they don’t think so in their mind. They could of saved more money or cut expenses, increase their income or did something that has a much better chance to have more money in the future. In Canada, in the 1990’s when interest rates were dropping from 10%, 9% to 8% down all the way to 5% to 6% in the late 1990’s, they were calling people who had money in GIC’s putting that in stocks, mutual funds GIC refugees. Just another indication that the main stream media does not really have the best interest of the public in many cases.

  55. Mira says:

    We gave the French the ass .. & did a big deal with the US & UK ..
    Nuclear Powered Subs .. Ha ha ha ha ha ha !!
    Who is the main man here .. cried our PM .. He, he, he .. Ah hah ha ha.
    I wonder if the French deal became unviable .. that the French could not or would not deliver .. ??
    And we had to seek else where to save face.
    “Phew.” .. went the PM & his fellow ministers.
    Though it cost us .. through the nose.

  56. Toni says:

    We need a very strong India with the help of the US, UK, Canada, Mexico, Japan and many other countries worldwide to counter balance China. India used to be a socialist economy but now we need a strong India to really make China sweat and be under pressure. The argument of alot of consumers to reach in China was made but India is just as important more so in my opinion.

  57. joe2 says:

    I don’t know. I’m never right about investing and I’ll never be rich – in dollars. I think my brain just doesn’t work that way. But….

    Given that:

    1) Property development … accounts for 28% of GDP.
    2) But it’s a whole industry. Evergrande just has the most debt.
    3) its dollar bond due in 2025 traded at 29 cents on the dollar
    4) unless the government steps in, and that hasn’t happened yet.

    If keeping peace in the property sector is so important to the CCP, and so many of the players are overleveraged, and the bonds are trading at $0.29 already:
    It seems to me the CCP will string the foreign investors along for a while to scare them into thinking they will get nothing back, and then nationalize Evergrande and payout around $0.25 on the dollar. The investors would be somewhat relieved and the CCP would stop a cascade of defaults, stabilize property at a lower price level spreading loses around.

    These loses could be mitigated psychologically with a little inflation. The CCP would acquire a huge asset at maybe it’s real price. A little sprucing up and just think of all the loyalty they could buy with all that patronage to pass around.

    But as I said, I’m never right. Just makes a nice story.

  58. Akakai Akakaikovitch says:

    “Since Evergrande does not have enough cash to pay off the debt that matures over the next 12 months, it has to raise new money to pay off those old investors.”

    Isn’t that the definition of a Ponzi scheme? Also hate to point out, but YANG 3X bear on Chinese market is up 30% in a few days, US markets very toppy.

  59. Ronald says:

    Maybe we should call it a commiescheme not a ponzi scheme. The new ponzi brought to you by the communist party of China.

  60. raxadian says:

    “The four property developers are Fantasia”

    As in their earnings are pure fantasy?

  61. Kingofmaple says:

    It would be interested to see Chinese government having the ball to crack down crazy leverages and speculation risks for the economy. Especially during a time when US printing to infinite Fed has China sandwiched at both ends of the production chain, such as doubled/tripled prices in raw materials etc. Tough position, tough decision, but could be one of the last few nails it needed to waken the sleeping dragon.

  62. c1ue says:

    A lot of hot air in the commentariat here.
    Let’s keep in mind:
    1) The Chinese government owns ALL the land in China. Period. There is no private ownership of the actual land, only long term leases.
    So does China really, really care if some foreigner forecloses on a bunch of buildings on said property? Good question.
    This is the collateral issue.
    2) China clearly thinks they can limit the internal damage from Evergrande and its peers. This isn’t outlandish – the CCP can easily institute some combination of tranche modification (i.e. put retail in front of the bondholders) with some form of limited bailout. I doubt they’d do a full bailout because they *want* the Chinese retail investor to learn a lesson from this. A 50% haircut?
    Note this would be a sea change vs. all of the past bailouts in US and European history – where the rich people/investors got their bite first and everyone else got to suck eggs.
    This is the internal China impact question.
    3) I guarantee that a ton of foreign firms invested in these bonds. This dovetails with China’s pushback against its demonization by the US. It also affects the pension funds etc that bought in – who in turn will impact a significant swath of the US population. This is entirely consistent with China’s crackdown on tech company listings abroad etc.

    This is a seminal moment: the Dow is crashing as I write this due to the “market’s” tantrum against the fed taper + debt ceiling kabuki. We all know what the Fed/USG will do – they will kneel down before their FIRE overlords.

    The CCP and China has never really been tested in this same means. We shall see.

    • Tom Pfotzer says:

      Best comment on the thread.

      We shall see.

      Remember how we all gave the Gov’t a good cussing because they (USG and Fed) bailed out the over-leveraged and highly-capital-misallocated banks who said “we’re too big to fail! Take us down, we take you down”.

      Remember that?

      Our economy (e.g. you) has/have been paying for that mistake since 2008.

      This event frames a very significant policy difference between China and the U.S. / West.

      If China follows through, and deftly manages this economic shift, they may put themselves on very strong footing going forward.

      Out of real estate, and into …. what? That’s the next big question. Where does China direct its investment?

  63. c smith says:

    “…thinking that the Chinese government wouldn’t let those companies default,”

    Why would they think that? Unlike the members of the Federal Reserve Board, the CCP is at no risk of losing its power and position no matter what happens in the Chinese economy. They answer to no one.

  64. Maf says:

    I skipped this podcast and now am going back to listen to it given today’s events.

    What I don’t understand is why wouldn’t Beijing provide a limited bailout and why is it affecting the US given the reported relatively limited exposure to us investors. If the US is really that exposed, China definitely can’t allow a complete collapse because they are so dependent on exporting to the US.

    I guess the question is why, given these realities, is the market taking such a hit?

Comments are closed.