> Bondholders of $19.2 billion in Evergrande dollar notes face deep haircuts as the company overhauls its mammoth balance sheet without a government bailout -- a process that promises to be long, contentious and potentially risky for Asia’s largest economy.
It might seem odd that a Chinese company would have taken out dollar loans, but the practice is common around the world. One reason is that the borrower can get lower interest rates because they assume the exchange rate risk themselves. If that bet goes sour, though, the borrower faces higher costs to service the debt.
Of course the thing about dollar bonds is that even if the national government were to intervene, those dollars can't be printed by Beijing.
The only way to service a dollar debt is to raise dollars. One path to doing that is to sell dollar-denominated assets. US Stocks and bonds in other words. So the pressures in China can spill over into the US economy through forced asset sales of dollar-denominated assets.
This is another angle to the contagion idea. Organizations around the world have taken big short position on the US dollar. As those loans come due, dollar assets are sold. Which drives the dollar higher. Which makes the dollar loans even more unsustainable. And so on.
It has been called the global dollar short squeeze:
And if you're really adventurous, there's something called the "dollar milkshake theory" which predicts the uncontrollable rise of the dollar as (maybe counterintuitively) a wrecking ball for the world economy:
19.2 billion is not that much money in the global banking system. There is no reason why bondholders should be guaranteed a return. Bankruptcy is an option.
The broader risk is an unwinding of Chinese holdings by foreign entities who suddenly realize that the Chinese government will have them foot the bill for bets gone bad, or simply bets that the Chinese government doesn't like. China has capital controls to manage these outflows.
Which all leads to the scenario where foreign investors in China's economy are probably going to get taken for a ride at some point. Arguably some companies like ARM are already in this situation but it's in everyone's interest to pretend they are not.
It's worth considering the relative sizes tho: the Chines government alone holds 11 trillion dollars in treasury bonds[0], the total US debt is about 28T.
Evergrande's USD-denominated debt is 20 billion, even if they wanted to cash it all out rather than just refinance it I doubt it would be such a huge wave.
Panicing investors fleeing to the USD safe haven seems more likely to cause trouble.
> One path to doing that is to sell dollar-denominated assets. US Stocks and bonds in other words.
A big part of the world economy is literally or effectively dollar-denominated, so a sale of dollar-denominated assets does not imply a sale of US stocks and bonds. You can sell just about anything for dollars.
> The only way to service a dollar debt is to raise dollars. One path to doing that is to sell dollar-denominated assets. US Stocks and bonds in other words. So the pressures in China can spill over into the US economy through forced asset sales of dollar-denominated assets.
During height of the 2008 financial crisis the Federal Resevere opened an currency swap facility with the Swiss National Bank and the ECB ultimately capped at $620 billion, with the express purpose of allowing the other central banks to bail out banks domiciled in their jurisdictions.
So with the cooperation of the Fed, it is possible for them to print dollars.
Worth noting that this "dollar short squeeze" is the exact opposite of the most common conspiracy theory about the dollar: that the Fed is printing them like its going out of style (through quantitative easing and whatnot) and destroying their value.
How can one participate in making profits during a "dollar short squeeze"?
GME was easy. Hold the stock, sell it to the shorts. How do you do that with US dollars?
Secondly, as crazy as this sounds, would it be one reason for the Fed to preemptively drive inflation? (I suppose a low constant multiple in devaluation wouldn't blunt a short squeeze peak entirely, but might make it less sharp?)
This is true, but I don't know to what extent Chinese businesses can purchase USD assets? My assumption is it's probably harder (you need Chinese government permission) to do so? Certainly chinese retail investors can't do it at the moment.
Goldman Sachs also estimated that Evergrande had about $300B of debt-to-equity that will be due in less than two years or so. Given the current market condition, I really don't see how Evergrande can ever recover.
The world economy is in trouble, the US has leadership issues and China has declining growth.
Inflation will soon strip away any gains in growth.
Hold onto your seat.
So I lived in a SE Asian country and saw this first hand.
There is no equity market (that you can trust), bonds pay nothing so property is what you invest in (or you just sit on cash that is rapidly losing value during to inflation). Ownership is recognized even by corrupt bureaucrats and courts. Ownership papers are next to sacred documents. And no property tax so zero holding costs. The perfect investment.
No legally defined ownership? No problem! The developer is working on it. They just need $30,000 USD down to secure a plot. Ownership papers will follow.
So you pile your savings into real estate. You dump every single dollar you have into speculative real estate developments.. A single family home 10 km from a major city costs more than it does in California (~$1.5M USD) and local median wages are 1/10th that of the US. You can visit developments that are nothing more than 100 homes that are concrete shells with rusting window frames. Maybe 1% occupied.
But don’t get me wrong, some developments fill up super quick. But some just die.
Want to rent a place? Fuck you. Owners aren’t banking on rent, so pay them $3k per month. It’s all about appreciation. They would be happy to leave it empty. Less hassle that way.
This is misleading and not very useful. Property and incomes are very local, so looking at the data at a country level doesn't tell you much. For example, in the US there is a massive variance in the ratio between different cities [1] and between cities and rural areas. Your China example is a great one for where the data especially falls apart - China has a very large rural, poor population while the large cities have grown significantly more affluent with prices and salaries to match.
This is a very simplistic view. I live in Austria. Believe me - houses are built very differently here. There are strict and severe regulations, governing the safety of the building, low energy consumption. Therefore houses are expensive. But they are built to last for generations. And I am not talking about the requirement of building a sturdier structure because of more cold weather conditions.
This is in stark contrast to the private houses I know of the US which may be even hauled from A to B and in my perception are more of cardboard-quality.
Imagine not living long enough to ever afford a house.
You can't by a tear down in Toronto, Vancouver, Montreal, etc for under a million. Houses rise in value at a rate of about $$1500-2000 a week (for years) while wages have been stagnant for decades. You could have bought a house for 450k-500k in 2005 and sold today for 2 million. I've seen condos that were 175k in 2006 sell for 850k today. You can't even buy a shack out side the city for less than 500k and most are going for over a million or two.
Average price of a house in Toronto will be over 4-5 million in the next decade while the average wage will still be 45-65k.
Ghana prices are completely bonkers. You have to work 100+ years to own property. Despite a expected life span of ~62 years and a population density somewhere in the middle grounds.
It seems to assume everyone is married, for one. Can someone tell me why such a trivially-calculated and easily-cooked example is useful here? Is there a source for their numbers?
Also, why are they saying “disposable income” when what they mean is _all their income_?
From their info page:
“Note that there is no standard formula to calculate property price indices. Our formulas differs from Case-Shiller Index, UK Housing Price Index, etc.
Price to Income Ratio is the basic measure for apartment purchase affordability (lower is better). It is generally calculated as the ratio of median apartment prices to median familial disposable income, expressed as years of income (although variations are used also elsewhere). Our formula assumes and uses:
- net disposable family income, as defined as 1.5 * the average net salary (50% is assumed percentage of women in the workforce)
- median apartment size is 90 square meters
price per square meter (the formula uses) is the average price of square meter in the city center and outside of the city center
Will the People's Bank of China be paying Evergrande's foreign debts (aka bonds)? How many derivative products were created off those in other markets? Will it be as bad as 2008/09 when Mortgage Backed Securities and their derivatives collapsed except this time it is Commercial Mortgage Backed Securities?
Just asking questions in case anyone closer to those business areas wants to chime in. I doubt there is transparency coming out of China about this.
Yes it matters
Yes there will be contagion
No it won’t stop until the government (Xi and PBoC) agree on how bad it will get before they start bailing others out.
Now that too big to fail is dead in China, expect more failures, basically.
Can someone here enlighten me how a default can be "contagious"?
I could imagine that Evergrande bonds become worthless so that many investors will realize losses. But surely no one, or very few, will have invested mostly into Evergrande bonds, right? So presumably, everyone will realize a relatively small loss, no?
One firm defaults, all their investors lose a bit of money. Now that they've lost a bit of money, they will have less money to lend to other firms. Now those firms find it harder to service their debts (eg they were planning to roll over their loans with other loans), so some of them default.
A firm in the real estate business defaults. That makes people think other firms in that business will also default. So then all real estate businesses find it a a bit harder to borrow.
Add leverage. I buy a loan from a number RE businesses, but I don't just use the money in my pocket. I borrow it from the bank at a lower rate than what I receive from Evergrande. They go bust, bank asks me for money, I need to sell my other loans in the RE firms. Those loans will go down in value, reflecting higher rates and making it harder for the firms. This credit cycle is described by Soros in his books. Works both ways actually, when things are good it's the reverse.
Apparently employees were told to invest in the company or they would be denied payment/bonuses. Feel sorry for everyone involved in this dumpster fire.
Maybe someone with more knowledge can explain this to me. When they defaulted, that means that they failed to pay back one of their debts, it does not mean that they are completely out of money, right? What stops them from selectively defaulting? Stop paying back some of the politically less important debts, and continue chugging on, servicing only certain debtors. I'd assume with unlimited political backing this should not be a problem.
OTOH I read somewhere that the political leadership is not amused and wants to make an example. Also, I would say China has benefited a lot from the international financial system and from the rules of international commerce, so they probably have to honor international debts.
Interesting. This is the biggest developer in a sector worth 29% of China's GDP. If they can fail, so can all the other ones. Who would invest in Chinese real estate now, and where is the needed 8% plus GDP growth needed by China to meet its annual targets going to appear from?
The Chinese. Real estate is really the only investment open to the middle class. Property owners have on average nearly three properties, something stupid like that. That won't change.
Might be a rough week for Tether and therefore all cryptocurrencies. Tether's finances are murky af but it's widely understood they hold a lot of Chinese commercial debt. Not Evergrande specifically. https://cointelegraph.com/news/did-conflicting-reports-about...
Bitcoin , which is supposed to be a hedge against uncertainty and inflation, going the opposite direction of S&P 500 despite virus, china, and inflation. goes to show how useless common narratives often are.
I think this is going to end up having some very broad ramifications. The last time a real estate started defaulting on it's debts it create a cascade that ultimately ended in the 2008 financial collapse.
This is very substantially different. The real problem with 2008 was all the banks were leveraged to the tits on mortgage backed securities.
Chinese banking system on the other hand is very conservative and the banks are state owned.
The problem wasn't real estate developers getting shreked but rather the financial institutions the underpin everything suddenly facing massive liquidity crisis and enormous losses as MBS plummeted.
I fully expect a bunch of over-leveraged Chinese RE developers to fold here but I don't expect further contagion unless there is something unaccounted for - like international institutions being overly exposed to bad Chinese RE debt or something.
I personally think people misunderstand this story. It's not a Lehman like structural issue.
It's a consumer confidence issue in the Chinese real estate bubble and public finance issue relating to how Chineee municipalities finance normal operations via land sales through special purpose vehicles.
Basically if Chinese people stop believing houses are an endless fountain of money they Chinese government is in an enormous mess and this seems to be a step towards that happening.
Any educated prediction on what the consequences of this might be for the rest of the world? Will the Bank of China bail them out like the US government did in 2008?
“Tether does not hold any commercial paper or other debt or securities issued by Evergrande and has never done so. As we have indicated in our published statements and our most recent assurance attestation with a reporting date of June 30, 2021, the vast majority of the commercial paper held by Tether is in A-2 and above rated issuers.”
Is there something I don’t know or are you just repeating stuff you think you know?
Evergrande defaults, contagion in China - ripple effects in china. Global media needs a story line to rattle the market, traders make money on the news. The world rolls on - it's not big enough to be a major problem. China can absorb this one.
Now if the entire real estate in China goes south - thats a global problem and a huge political issue. That would signal that we might be on a warpath as the party would need to stabilize the economy with some kind of threat narrative or risk being run out of office. This is *highly speculative* of course.
[+] [-] pezzana|4 years ago|reply
> Bondholders of $19.2 billion in Evergrande dollar notes face deep haircuts as the company overhauls its mammoth balance sheet without a government bailout -- a process that promises to be long, contentious and potentially risky for Asia’s largest economy.
https://www.bloomberg.com/news/articles/2021-12-09/evergrand...
It might seem odd that a Chinese company would have taken out dollar loans, but the practice is common around the world. One reason is that the borrower can get lower interest rates because they assume the exchange rate risk themselves. If that bet goes sour, though, the borrower faces higher costs to service the debt.
Of course the thing about dollar bonds is that even if the national government were to intervene, those dollars can't be printed by Beijing.
The only way to service a dollar debt is to raise dollars. One path to doing that is to sell dollar-denominated assets. US Stocks and bonds in other words. So the pressures in China can spill over into the US economy through forced asset sales of dollar-denominated assets.
This is another angle to the contagion idea. Organizations around the world have taken big short position on the US dollar. As those loans come due, dollar assets are sold. Which drives the dollar higher. Which makes the dollar loans even more unsustainable. And so on.
It has been called the global dollar short squeeze:
https://www.lynalden.com/global-dollar-short-squeeze/
And if you're really adventurous, there's something called the "dollar milkshake theory" which predicts the uncontrollable rise of the dollar as (maybe counterintuitively) a wrecking ball for the world economy:
https://www.youtube.com/watch?v=2qTOWuL7Zco
[+] [-] lumost|4 years ago|reply
The broader risk is an unwinding of Chinese holdings by foreign entities who suddenly realize that the Chinese government will have them foot the bill for bets gone bad, or simply bets that the Chinese government doesn't like. China has capital controls to manage these outflows.
Which all leads to the scenario where foreign investors in China's economy are probably going to get taken for a ride at some point. Arguably some companies like ARM are already in this situation but it's in everyone's interest to pretend they are not.
[+] [-] riffraff|4 years ago|reply
Evergrande's USD-denominated debt is 20 billion, even if they wanted to cash it all out rather than just refinance it I doubt it would be such a huge wave.
Panicing investors fleeing to the USD safe haven seems more likely to cause trouble.
[0] https://www.thebalance.com/how-much-u-s-debt-does-china-own-... [1] https://www.ft.com/content/7ac2d661-5a63-4768-91a1-182f02b2a...
[+] [-] Denvercoder9|4 years ago|reply
A big part of the world economy is literally or effectively dollar-denominated, so a sale of dollar-denominated assets does not imply a sale of US stocks and bonds. You can sell just about anything for dollars.
[+] [-] JackFr|4 years ago|reply
During height of the 2008 financial crisis the Federal Resevere opened an currency swap facility with the Swiss National Bank and the ECB ultimately capped at $620 billion, with the express purpose of allowing the other central banks to bail out banks domiciled in their jurisdictions.
So with the cooperation of the Fed, it is possible for them to print dollars.
[+] [-] khuey|4 years ago|reply
[+] [-] echelon|4 years ago|reply
GME was easy. Hold the stock, sell it to the shorts. How do you do that with US dollars?
Secondly, as crazy as this sounds, would it be one reason for the Fed to preemptively drive inflation? (I suppose a low constant multiple in devaluation wouldn't blunt a short squeeze peak entirely, but might make it less sharp?)
[+] [-] dageshi|4 years ago|reply
[+] [-] hintymad|4 years ago|reply
[+] [-] duxup|4 years ago|reply
Man that seems like “doubling down” (I’m thinking of the gambling term) on a business bet…
[+] [-] peter_retief|4 years ago|reply
[+] [-] fasteddie31003|4 years ago|reply
[+] [-] refurb|4 years ago|reply
There is no equity market (that you can trust), bonds pay nothing so property is what you invest in (or you just sit on cash that is rapidly losing value during to inflation). Ownership is recognized even by corrupt bureaucrats and courts. Ownership papers are next to sacred documents. And no property tax so zero holding costs. The perfect investment.
No legally defined ownership? No problem! The developer is working on it. They just need $30,000 USD down to secure a plot. Ownership papers will follow.
So you pile your savings into real estate. You dump every single dollar you have into speculative real estate developments.. A single family home 10 km from a major city costs more than it does in California (~$1.5M USD) and local median wages are 1/10th that of the US. You can visit developments that are nothing more than 100 homes that are concrete shells with rusting window frames. Maybe 1% occupied.
But don’t get me wrong, some developments fill up super quick. But some just die.
Want to rent a place? Fuck you. Owners aren’t banking on rent, so pay them $3k per month. It’s all about appreciation. They would be happy to leave it empty. Less hassle that way.
Seems like a recipe for a major housing crash.
[+] [-] mdorazio|4 years ago|reply
[1] https://archive.md/aU31p
[+] [-] jhoechtl|4 years ago|reply
This is in stark contrast to the private houses I know of the US which may be even hauled from A to B and in my perception are more of cardboard-quality.
[+] [-] hourislate|4 years ago|reply
You can't by a tear down in Toronto, Vancouver, Montreal, etc for under a million. Houses rise in value at a rate of about $$1500-2000 a week (for years) while wages have been stagnant for decades. You could have bought a house for 450k-500k in 2005 and sold today for 2 million. I've seen condos that were 175k in 2006 sell for 850k today. You can't even buy a shack out side the city for less than 500k and most are going for over a million or two.
Average price of a house in Toronto will be over 4-5 million in the next decade while the average wage will still be 45-65k.
[+] [-] AussieWog93|4 years ago|reply
I thought we all had it really bad. Apparently not.
[+] [-] JamesSwift|4 years ago|reply
[+] [-] unknown|4 years ago|reply
[deleted]
[+] [-] mstaoru|4 years ago|reply
[+] [-] polycaster|4 years ago|reply
Ghana prices are completely bonkers. You have to work 100+ years to own property. Despite a expected life span of ~62 years and a population density somewhere in the middle grounds.
Something went utterly wrong I'd say.
[+] [-] pfortuny|4 years ago|reply
[+] [-] bamboozled|4 years ago|reply
[+] [-] t8e56vd4ih|4 years ago|reply
[deleted]
[+] [-] ppier|4 years ago|reply
It seems to assume everyone is married, for one. Can someone tell me why such a trivially-calculated and easily-cooked example is useful here? Is there a source for their numbers?
Also, why are they saying “disposable income” when what they mean is _all their income_?
From their info page:
“Note that there is no standard formula to calculate property price indices. Our formulas differs from Case-Shiller Index, UK Housing Price Index, etc.
Price to Income Ratio is the basic measure for apartment purchase affordability (lower is better). It is generally calculated as the ratio of median apartment prices to median familial disposable income, expressed as years of income (although variations are used also elsewhere). Our formula assumes and uses:
- net disposable family income, as defined as 1.5 * the average net salary (50% is assumed percentage of women in the workforce) - median apartment size is 90 square meters price per square meter (the formula uses) is the average price of square meter in the city center and outside of the city center
...”
[+] [-] FuriouslyAdrift|4 years ago|reply
[+] [-] matt_s|4 years ago|reply
Just asking questions in case anyone closer to those business areas wants to chime in. I doubt there is transparency coming out of China about this.
[+] [-] thedudeabides5|4 years ago|reply
Yes it matters Yes there will be contagion No it won’t stop until the government (Xi and PBoC) agree on how bad it will get before they start bailing others out.
Now that too big to fail is dead in China, expect more failures, basically.
https://t.co/TXNfUdoVi5
[+] [-] choeger|4 years ago|reply
I could imagine that Evergrande bonds become worthless so that many investors will realize losses. But surely no one, or very few, will have invested mostly into Evergrande bonds, right? So presumably, everyone will realize a relatively small loss, no?
[+] [-] lordnacho|4 years ago|reply
A firm in the real estate business defaults. That makes people think other firms in that business will also default. So then all real estate businesses find it a a bit harder to borrow.
Add leverage. I buy a loan from a number RE businesses, but I don't just use the money in my pocket. I borrow it from the bank at a lower rate than what I receive from Evergrande. They go bust, bank asks me for money, I need to sell my other loans in the RE firms. Those loans will go down in value, reflecting higher rates and making it harder for the firms. This credit cycle is described by Soros in his books. Works both ways actually, when things are good it's the reverse.
[+] [-] mensetmanusman|4 years ago|reply
[+] [-] captainmuon|4 years ago|reply
OTOH I read somewhere that the political leadership is not amused and wants to make an example. Also, I would say China has benefited a lot from the international financial system and from the rules of international commerce, so they probably have to honor international debts.
[+] [-] Kye|4 years ago|reply
--
Some good explanatory threads I saved when the Evergrande news first broke a couple of months ago:
https://twitter.com/SahilBloom/status/1439920043404546050
https://twitter.com/FabiusMercurius/status/14392189567791513...
https://twitter.com/INArteCarloDoss/status/14389444317349191...
[+] [-] teddyh|4 years ago|reply
[+] [-] globalise83|4 years ago|reply
[+] [-] Hokusai|4 years ago|reply
It's not that true for Western countries after the 2008 financial crisis? It seems to not have stopped housing bubbles.
[+] [-] Bayart|4 years ago|reply
The Chinese. Real estate is really the only investment open to the middle class. Property owners have on average nearly three properties, something stupid like that. That won't change.
[+] [-] NelsonMinar|4 years ago|reply
[+] [-] paulpauper|4 years ago|reply
[+] [-] bluedays|4 years ago|reply
[+] [-] jpgvm|4 years ago|reply
Chinese banking system on the other hand is very conservative and the banks are state owned.
The problem wasn't real estate developers getting shreked but rather the financial institutions the underpin everything suddenly facing massive liquidity crisis and enormous losses as MBS plummeted.
I fully expect a bunch of over-leveraged Chinese RE developers to fold here but I don't expect further contagion unless there is something unaccounted for - like international institutions being overly exposed to bad Chinese RE debt or something.
[+] [-] anm89|4 years ago|reply
It's a consumer confidence issue in the Chinese real estate bubble and public finance issue relating to how Chineee municipalities finance normal operations via land sales through special purpose vehicles.
Basically if Chinese people stop believing houses are an endless fountain of money they Chinese government is in an enormous mess and this seems to be a step towards that happening.
[+] [-] gvv|4 years ago|reply
[+] [-] danlugo92|4 years ago|reply
[+] [-] JohnJamesRambo|4 years ago|reply
Is there something I don’t know or are you just repeating stuff you think you know?
[+] [-] ur-whale|4 years ago|reply
Anyone know where to find the figure?
[+] [-] unknown|4 years ago|reply
[deleted]
[+] [-] boringg|4 years ago|reply
Now if the entire real estate in China goes south - thats a global problem and a huge political issue. That would signal that we might be on a warpath as the party would need to stabilize the economy with some kind of threat narrative or risk being run out of office. This is *highly speculative* of course.
[+] [-] mkoryak|4 years ago|reply