Evergrande is going Belly Up.

[Strangelovesurfing + 737]

Look's like the CCP's financial crisis has arrived. This is as big as it gets, everything now depends on government action.

Bloomberg -

China’s Nightmare Evergrande Scenario Is an Uncontrolled Crash

Hong ShenSeptember 16, 2021, 6:00 AM HST

Protests intensify at China Evergrande Group offices across the country as the developer falls further behind on promises to more than 70,000 investors. Construction of unfinished properties with enough floor space to cover three-fourths of Manhattan grinds to a halt, leaving more than a million homebuyers in limbo.

Fire sales pummel an already shaky real estate market, squeezing other developers and rippling through a supply chain that accounts for more than a quarter of Chinese economic output. Covid-weary consumers retrench even further, and the risk of popular discontent rises during a politically sensitive transition period for President Xi Jinping. Credit-market stress spreads from lower-rated property companies to stronger peers and banks. Global investors who bought $527 billion of Chinese stocks and bonds in the 15 months through June begin to sell.

While it’s impossible to know for sure what would happen if Beijing allows Evergrande’s downward spiral to continue unabated, China watchers are gaming out worst-case scenarios as they contemplate how much pain the Communist Party is willing to tolerate. Pressure to intervene is growing as signs of financial contagion increase. 

“As a systemically important developer, an Evergrande bankruptcy would cause problems for the entire property sector,” said Shen Meng, director of Chanson & Co., a Beijing-based boutique investment bank. “Debt recovery efforts by creditors would lead to fire sales of assets and hit housing prices. Profit margins across the supply chain would be squeezed. It would also lead to panic selling in capital markets.”

 

For now, Shen and nearly all of the other bankers, analysts and investors interviewed for this story say Beijing is in no mood for a Lehman moment. Rather than allow a chaotic collapse into bankruptcy, they predict regulators will engineer a restructuring of Evergrande’s $300 billion pile of liabilities that keeps systemic risk to a minimum. Markets seem to agree: the Shanghai Composite Index is less than 3% from a six-year high and the yuan is trading near the strongest level in three months against the dollar.

Yet a benign outcome is far from assured. Beijing’s bungled stock-market rescue in 2015 showed how difficult it can be for policy makers to control financial outcomes, even in a system where the government runs most of the banks and can exert outsized pressure on creditors, suppliers and other counterparties.

Contagion risk was on full display Thursday. Chinese junk-bond yields jumped to an 18-month high and shares of real estate companies plunged after Evergrande had its credit rating downgraded and requested a trading halt in its onshore bonds. Some banks in China appear to be hoarding yuan at the highest cost in almost four years, a sign they may be preparing for what a Mizuho Financial Group Inc. strategist called a “liquidity squeeze in crisis mode.” 

 

Where Xi will ultimately draw the line remains a mystery. While China’s top financial regulator has urged billionaire Evergrande founder Hui Ka Yan to solve his company’s debt problems, authorities have yet to spell out whether the government would allow a major debt restructuring or bankruptcy.

Even senior officials at state-owned banks say privately that they’re still waiting for guidance on a long-term solution from top leaders in Beijing. Evergrande’s main banks were told by China’s housing ministry this week that the developer won’t be able to make interest payments due Sept. 20, according to people familiar with the matter.

China’s government isn’t averse to taking over companies from the private sector if needed. It seized Baoshang Bank Co. in 2019 and assumed control of HNA Group Co., the once-sprawling conglomerate, in early 2020 after the coronavirus pandemic decimated the company’s main travel business. Court-led restructurings have also become more common in recent years, with more than 700 being completed in 2020.

Read more:
Evergrande Market Fallout Grows as Local Unit Halts Bond Trading
What Is China Evergrande and Why Is It in Trouble?: QuickTake
Evergrande 75% Haircut Is Now a Base Case for Bond Analysts
Angry Evergrande Homebuyers Protest Against Construction Halt
China Tells Banks Evergrande Won’t Pay Interest Next Week

The Evergrande endgame may depend largely on how Xi decides to balance his goals of maintaining social and financial stability against his multi-year campaign to reduce moral hazard. The timing is particularly tricky as China juggles an economic slowdown, a sweeping crackdown on the private sector and rising tensions with Washington -- all in the runup to a once-in-five-year leadership reshuffle in 2022 at which Xi is set to extend his indefinite rule.

“The government has to be very, very careful in balancing support for Evergrande,” said Yu Yong, a former China Banking and Insurance Regulatory Commission regulator and now chief risk officer at China Agriculture Reinsurance Fund.

“Property is the biggest bubble that everyone has been talking about in China,” Yu told Everbright Sun Hung Kai analyst Jonas Short in a recent podcast. “So if anything happens, this could clearly cause systematic risk to the whole China economy.”

Here are some of the factors that may sway Chinese leaders:

Social Unrest

Maintaining social order has always been paramount for the Communist Party, which has little tolerance for protests of any kind. In Guangzhou, homebuyers surrounded a local housing bureau last week to demand Evergrande restart stalled construction. Disgruntled retail investors have gathered at the company’s Shenzhen headquarters for at least three straight days this week, and unconfirmed videos of protests against the developer in other parts of China have been shared widely online.

Evergrande had 1.3 trillion yuan ($202 billion) in presale liabilities at the end of June, equivalent to about 1.4 million individual properties that it has committed to complete, according to a Capital Economics report last week. 

“If Evergrande had to dump its inventory onto the market” it would “drag down property prices substantially,” said Hao Hong, chief strategist at Bocom International. 

Without a social safety net and with limited places to put their money, Chinese savers have for years been encouraged to buy homes whose prices were only ever supposed to go up. Today, real estate accounts for 40% of household assets and buying a house (or two) is a cultural touchstone. While housing affordability has become a hot topic in the West, many Chinese are more likely to protest falling home prices than spiking ones. 

“Given that the bulk of people’s wealth is already in property, even a 10% correction would be a serious knock to many people,” said Fraser Howie, an independent analyst and co-author of books on Chinese finance who has been following the country’s corporate sector for decades. “It would certainly knock their hopes and dreams and expectations about what property is.”

Another potential flashpoint is whether Evergrande can repay high-yield wealth management products that it sold to thousands of retail investors, including many of its own employees. About 40 billion yuan of the WMPs are due to be repaid, according to Caixin, a Chinese financial news service. Evergrande is trying to free up cash by selling assets, including stakes in its electric-car and property-management businesses, but has so far made little progress.

Capital Markets

Evergrande is the largest high-yield dollar bond issuer in China, accounting for 16% of outstanding notes, according to Bank of America Corp. analysts. Should the company collapse, that alone would push the default rate on the country’s junk dollar bond market to 14% from 3%, they wrote in a note this month. 

What's moving marketsStart your day with the 5 Things newsletter.

Sign up to this newsletter

While Beijing has become more comfortable with allowing weaker businesses to fail, an uncontrolled spike in offshore funding costs would risk derailing a key source of financing. It could also undermine global confidence in the country’s issuers at a time when Beijing is pushing for larger foreign investor ownership. Yields on China’s junk dollar bonds are nearing 14%, up from about 7.4% in February, according to a Bloomberg index.

Evergrande dollar debt holders may not have priority in a restructuring, Citigroup strategists say.

The stakes are higher on the mainland, where the credit market is about 15 times the size at $12 trillion. While Evergrande is less of a whale onshore, a collapse could force banks to cut their holdings of corporate notes and even freeze money markets -- the very plumbing of China’s financial system. In such a credit crunch, the government or central bank would likely be forced to act. Banks involved in property lending may come under pressure, leading to an increase in soured loans. Smaller banks exposed to Evergrande or other weaker developers may face “significant” increases in non-performing loans in the event of a default, according to Fitch Ratings.

Economic Impact

Concern over Evergrande comes at a time when China’s economy is already slowing. Aggressive controls to curb outbreaks of Covid-19 are hurting retail spending and travel, while measures to cool property prices are taking a toll. 

Sales of household appliances, cars and furniture worsened in August. Source: Bank of America Global Research

Data this week showed home sales by value slumped 20% in August from a year earlier, the biggest drop since the onset of the coronavirus early last year. Responding to a question on Evergrande’s potential impact on the economy, National Bureau of Statistics spokesman Fu Linghui said some large property enterprises are running into difficulties and the fallout “remains to be seen.” 

China’s current priorities of promoting “common prosperity” and deterring excessive risk-taking mean there’s unlikely to be any easing of property curbs this year, according to Macquarie Group Ltd. The sector will be a “main growth headwind” for next year, although policy makers may loosen restrictions to defend growth goals, Macquarie analysts wrote in a Wednesday note.

A correction in China’s property market would not only slow the domestic economy but have global consequences too.

“A significant slowdown in property construction over the next few years appears probable already, and would become even more likely in the event of an Evergrande failure or bankruptcy,” said Logan Wright, a Hong Kong-based director at research firm Rhodium Group LLC. “A long-term slowdown in property construction, an industry that represents around a fifth or a quarter of China’s economy by most estimates, would cause a significant decline in GDP growth, commodity demand, and would likely have disinflationary effects globally.”

 

CNBC -

 

China’s embattled developer Evergrande is on the brink of default. Here’s why it matters

Weizhen Tan

 

The Emerald Bay residential project developed by China Evergrande in the Tuen Mun district of the New Territories in Hong Kong, China, on Friday, July 23, 2021.

Lam Yik | Bloomberg | Getty Images

Chinese property giant Evergrande is on the brink of collapse, and analysts warn the potential fallout could have far-reaching implications that spill outside China’s borders.

“Evergrande’s collapse would be the biggest test that China’s financial system has faced in years,” says Mark Williams, chief Asia economist at Capital Economics.

Here’s how bad its problems are, and what’s in store for investors.

How did we get here?

After expanding rapidly for years and snapping up assets as China’s economy boomed, Evergrande is now snowed under a crushing debt of $300 billion.

The world’s most indebted property developer has been scrambling to pay its suppliers, and warned investors twice in as many weeks that it could default on its debts.

On Tuesday, Evergrande said its property sales will likely continue to drop significantly in September after declining for months, making its cash flow situation even more dire.

The Chinese developer is so huge that the fallout from a potential failure could hurt not only the Chinese economy, but spread to markets beyond.

 

Evergrande’s collapse would be the biggest test that China’s financial system has faced in years.

Mark Williams

Capital Economics, chief Asia economist

Banks have also responded to its deteriorating cash flow. Some in Hong Kong, including HSBC and Standard Chartered, have declined to extend new loans to buyers of two uncompleted Evergrande residential projects, said Reuters.

Ratings agencies have repeatedly downgraded the firm, citing its liquidity problems. Evergrande’s problems intensified last year when China introduced rules to rein in the borrowing costs of developers. Those measures place a cap on debt in relation to a firm’s cash flows, assets and capital levels.

Evergrande stock performance (HKD) year-to-date

Evergrande stock (Hong Kong-listed)

Feb ’21Mar ’21Apr ’21May ’21Jun ’21Jul ’21Aug ’21Sep ’21051015cnbc.com

Its share price plunged nearly 80% so far this year, and trading of its bonds was repeatedly halted by Chinese stock exchanges in the past weeks.

What does Evergrande do?

Evergrande is everywhere. Its main business is in real estate, and it’s China’s second-largest property developer by sales.

• Evergrande owns more than 1,300 real estate projects in over 280 cities in China.
• Its property services management arm is involved in nearly 2,800 projects across more than 310 cities in China.
• The company has seven units dabbling in a wide range of industries, including electric vehicles, health-care services, consumer products, video and television production units and even a theme park.
• The firm says it has 200,000 employees, but indirectly creates more than 3.8 million jobs every year, according to its website.
• Evergrande’s shares and bonds are included in indexes across Asia.

Who will be affected?

The pool of affected parties include banks, suppliers, home-buyers and investors.

Evergrande warned this week its escalating troubles could lead to broader default risks.

It said that if it can’t repay its debt, it may lead to a situation of “cross default” — where a default triggered in one situation may spread to other obligations, leading to broader contagion.

 

A banking failure triggered by the collapse of major property developers was the single most likely scenario that could lead to a hard landing in China.

Mark Williams

Capital Economics, chief Asia economist

1. Banks

The banking industry would be among the first to be hit if there are any contagion effects on the wider property sector in China, said Williams of Capital Economics.

“A banking failure triggered by the collapse of major property developers was the single most likely scenario that could lead to a hard landing in China. And the fact that financial markets aren’t currently signaling alarm doesn’t mean they won’t,” Williams wrote in a note last week.

2. Homebuyers and investors

Protests by angry homebuyers and investors broke out in recent days in some cities, and social unrest is among the concerns.

On Monday, around 100 investors turned up at Evergrande’s headquarters in Shenzhen, demanding repayment of loans on overdue financial products — forming chaotic scenes, according to Reuters.

Read more about China from CNBC Pro

Singapore’s top lender picks Chinese stocks for ‘bottom fishers’

Morgan Stanley picks out high-conviction China stocks

Mark Mobius: China’s regulatory crackdown is creating investment opportunities

In fact, sentiment is already spreading to Asia high yield bonds. Yields on Asian offshore bonds, dominated by property firms, have spiked to an average of 13%, according to TS Lombard.

That also means offshore investors are at the losing end, the research firm said in a note last week.

“The company’s guarantee to deliver all pre-sold projects is likely to lead to overseas stakeholders seeing little, if anything, from the ultimate sale of a developer’s assets in the event of a bailout,” said TS Lombard.

“Hence the prospect of an unequal swap, where the interests of on-shore lenders – households and banks – are protected at the expense of equity and off-shore bondholders,” the note said.

3. Suppliers

The implications of Evergrande’s failure could also reverberate through to other industries if suppliers are not paid. According to S&P Global Ratings, Evergrande might be “trying to persuade” its suppliers and contractors to accept physical properties as payment — in a bid to preserve cash for loan repayments.

 

I believe there will be some supporting measures from the central government, or even the central bank, trying to bail out Evergrande.

Dan Wang

economist, Hang Seng Bank

In an August report, S&P estimated that over the next 12 months, Evergrande will have over 240 billion yuan ($37.16 billion) of bills and trade payables from contractors to settle — around 100 billion yuan of that amount is due this year. 

A paint supplier to Evergrande, Shanghai-listed Skshu Paint, said in a filing that the real estate firm repaid part of its debt in properties – and uncompleted ones at that.

Ratings agency Fitch said banks may also have indirect exposure to Evergrande’s suppliers — the developer’s trade payables stood at 667 billion Chinese yuan, according to Fitch analysis.

Is Evergrande too big to fail?

The government is likely to step in due to how important Evergrande is, according to analysts.

“Evergrande is such an important real estate developer, and it would be a strong signal if anything happened to it,” said Dan Wang, an economist at Hang Seng Bank. “I believe there will be some supporting measures from the central government, or even the central bank, trying to bail out Evergrande.”

But a restructuring could be more likely, according to other analysts.

“The most likely endgame is now a managed restructuring in which other developers take over Evergrande’s uncompleted projects in exchange for a share of its land bank,” Williams of Capital Economics said in a note last week.

It’s likely that the government will prioritize homebuyers and banks over other parties, he said.

“Policymakers’ main priority would be the households that have handed over deposits for properties that haven’t yet been finished. The company’s other creditors would suffer,” Williams wrote.

Investment bank Natixis said the Chinese government will avoid “systemic risks” in the lead-up to the 2022 National Congress of the Chinese Communist Party, given its historical importance.

“However, this would also imply China Evergrande’s debt crisis may snowball down the road,” the bank said in a note, adding that economic growth will not mitigate financial losses as was the case in the past.

Edited September 17, 2021 by Strangelovesurfing

[turbguy + 1,544]

I smell a "bailout".

I have some credit default swaps to sell.

[Wombat1 + 33]

16 hours ago, Strangelovesurfing said:

Look's like the CCP's financial crisis has arrived. This is as big as it gets, everything now depends on government action.

Bloomberg -

China’s Nightmare Evergrande Scenario Is an Uncontrolled Crash

Hong ShenSeptember 16, 2021, 6:00 AM HST

Protests intensify at China Evergrande Group offices across the country as the developer falls further behind on promises to more than 70,000 investors. Construction of unfinished properties with enough floor space to cover three-fourths of Manhattan grinds to a halt, leaving more than a million homebuyers in limbo.

Fire sales pummel an already shaky real estate market, squeezing other developers and rippling through a supply chain that accounts for more than a quarter of Chinese economic output. Covid-weary consumers retrench even further, and the risk of popular discontent rises during a politically sensitive transition period for President Xi Jinping. Credit-market stress spreads from lower-rated property companies to stronger peers and banks. Global investors who bought $527 billion of Chinese stocks and bonds in the 15 months through June begin to sell.

While it’s impossible to know for sure what would happen if Beijing allows Evergrande’s downward spiral to continue unabated, China watchers are gaming out worst-case scenarios as they contemplate how much pain the Communist Party is willing to tolerate. Pressure to intervene is growing as signs of financial contagion increase. 

“As a systemically important developer, an Evergrande bankruptcy would cause problems for the entire property sector,” said Shen Meng, director of Chanson & Co., a Beijing-based boutique investment bank. “Debt recovery efforts by creditors would lead to fire sales of assets and hit housing prices. Profit margins across the supply chain would be squeezed. It would also lead to panic selling in capital markets.”

 

For now, Shen and nearly all of the other bankers, analysts and investors interviewed for this story say Beijing is in no mood for a Lehman moment. Rather than allow a chaotic collapse into bankruptcy, they predict regulators will engineer a restructuring of Evergrande’s $300 billion pile of liabilities that keeps systemic risk to a minimum. Markets seem to agree: the Shanghai Composite Index is less than 3% from a six-year high and the yuan is trading near the strongest level in three months against the dollar.

Yet a benign outcome is far from assured. Beijing’s bungled stock-market rescue in 2015 showed how difficult it can be for policy makers to control financial outcomes, even in a system where the government runs most of the banks and can exert outsized pressure on creditors, suppliers and other counterparties.

Contagion risk was on full display Thursday. Chinese junk-bond yields jumped to an 18-month high and shares of real estate companies plunged after Evergrande had its credit rating downgraded and requested a trading halt in its onshore bonds. Some banks in China appear to be hoarding yuan at the highest cost in almost four years, a sign they may be preparing for what a Mizuho Financial Group Inc. strategist called a “liquidity squeeze in crisis mode.” 

 

Where Xi will ultimately draw the line remains a mystery. While China’s top financial regulator has urged billionaire Evergrande founder Hui Ka Yan to solve his company’s debt problems, authorities have yet to spell out whether the government would allow a major debt restructuring or bankruptcy.

Even senior officials at state-owned banks say privately that they’re still waiting for guidance on a long-term solution from top leaders in Beijing. Evergrande’s main banks were told by China’s housing ministry this week that the developer won’t be able to make interest payments due Sept. 20, according to people familiar with the matter.

China’s government isn’t averse to taking over companies from the private sector if needed. It seized Baoshang Bank Co. in 2019 and assumed control of HNA Group Co., the once-sprawling conglomerate, in early 2020 after the coronavirus pandemic decimated the company’s main travel business. Court-led restructurings have also become more common in recent years, with more than 700 being completed in 2020.

Read more:
Evergrande Market Fallout Grows as Local Unit Halts Bond Trading
What Is China Evergrande and Why Is It in Trouble?: QuickTake
Evergrande 75% Haircut Is Now a Base Case for Bond Analysts
Angry Evergrande Homebuyers Protest Against Construction Halt
China Tells Banks Evergrande Won’t Pay Interest Next Week

The Evergrande endgame may depend largely on how Xi decides to balance his goals of maintaining social and financial stability against his multi-year campaign to reduce moral hazard. The timing is particularly tricky as China juggles an economic slowdown, a sweeping crackdown on the private sector and rising tensions with Washington -- all in the runup to a once-in-five-year leadership reshuffle in 2022 at which Xi is set to extend his indefinite rule.

“The government has to be very, very careful in balancing support for Evergrande,” said Yu Yong, a former China Banking and Insurance Regulatory Commission regulator and now chief risk officer at China Agriculture Reinsurance Fund.

“Property is the biggest bubble that everyone has been talking about in China,” Yu told Everbright Sun Hung Kai analyst Jonas Short in a recent podcast. “So if anything happens, this could clearly cause systematic risk to the whole China economy.”

Here are some of the factors that may sway Chinese leaders:

Social Unrest

Maintaining social order has always been paramount for the Communist Party, which has little tolerance for protests of any kind. In Guangzhou, homebuyers surrounded a local housing bureau last week to demand Evergrande restart stalled construction. Disgruntled retail investors have gathered at the company’s Shenzhen headquarters for at least three straight days this week, and unconfirmed videos of protests against the developer in other parts of China have been shared widely online.

Evergrande had 1.3 trillion yuan ($202 billion) in presale liabilities at the end of June, equivalent to about 1.4 million individual properties that it has committed to complete, according to a Capital Economics report last week. 

“If Evergrande had to dump its inventory onto the market” it would “drag down property prices substantially,” said Hao Hong, chief strategist at Bocom International. 

Without a social safety net and with limited places to put their money, Chinese savers have for years been encouraged to buy homes whose prices were only ever supposed to go up. Today, real estate accounts for 40% of household assets and buying a house (or two) is a cultural touchstone. While housing affordability has become a hot topic in the West, many Chinese are more likely to protest falling home prices than spiking ones. 

“Given that the bulk of people’s wealth is already in property, even a 10% correction would be a serious knock to many people,” said Fraser Howie, an independent analyst and co-author of books on Chinese finance who has been following the country’s corporate sector for decades. “It would certainly knock their hopes and dreams and expectations about what property is.”

Another potential flashpoint is whether Evergrande can repay high-yield wealth management products that it sold to thousands of retail investors, including many of its own employees. About 40 billion yuan of the WMPs are due to be repaid, according to Caixin, a Chinese financial news service. Evergrande is trying to free up cash by selling assets, including stakes in its electric-car and property-management businesses, but has so far made little progress.

Capital Markets

Evergrande is the largest high-yield dollar bond issuer in China, accounting for 16% of outstanding notes, according to Bank of America Corp. analysts. Should the company collapse, that alone would push the default rate on the country’s junk dollar bond market to 14% from 3%, they wrote in a note this month. 

What's moving marketsStart your day with the 5 Things newsletter.

Sign up to this newsletter

While Beijing has become more comfortable with allowing weaker businesses to fail, an uncontrolled spike in offshore funding costs would risk derailing a key source of financing. It could also undermine global confidence in the country’s issuers at a time when Beijing is pushing for larger foreign investor ownership. Yields on China’s junk dollar bonds are nearing 14%, up from about 7.4% in February, according to a Bloomberg index.

Evergrande dollar debt holders may not have priority in a restructuring, Citigroup strategists say.

The stakes are higher on the mainland, where the credit market is about 15 times the size at $12 trillion. While Evergrande is less of a whale onshore, a collapse could force banks to cut their holdings of corporate notes and even freeze money markets -- the very plumbing of China’s financial system. In such a credit crunch, the government or central bank would likely be forced to act. Banks involved in property lending may come under pressure, leading to an increase in soured loans. Smaller banks exposed to Evergrande or other weaker developers may face “significant” increases in non-performing loans in the event of a default, according to Fitch Ratings.

Economic Impact

Concern over Evergrande comes at a time when China’s economy is already slowing. Aggressive controls to curb outbreaks of Covid-19 are hurting retail spending and travel, while measures to cool property prices are taking a toll. 

Sales of household appliances, cars and furniture worsened in August. Source: Bank of America Global Research

Data this week showed home sales by value slumped 20% in August from a year earlier, the biggest drop since the onset of the coronavirus early last year. Responding to a question on Evergrande’s potential impact on the economy, National Bureau of Statistics spokesman Fu Linghui said some large property enterprises are running into difficulties and the fallout “remains to be seen.” 

China’s current priorities of promoting “common prosperity” and deterring excessive risk-taking mean there’s unlikely to be any easing of property curbs this year, according to Macquarie Group Ltd. The sector will be a “main growth headwind” for next year, although policy makers may loosen restrictions to defend growth goals, Macquarie analysts wrote in a Wednesday note.

A correction in China’s property market would not only slow the domestic economy but have global consequences too.

“A significant slowdown in property construction over the next few years appears probable already, and would become even more likely in the event of an Evergrande failure or bankruptcy,” said Logan Wright, a Hong Kong-based director at research firm Rhodium Group LLC. “A long-term slowdown in property construction, an industry that represents around a fifth or a quarter of China’s economy by most estimates, would cause a significant decline in GDP growth, commodity demand, and would likely have disinflationary effects globally.”

 

CNBC -

 

China’s embattled developer Evergrande is on the brink of default. Here’s why it matters

Weizhen Tan

 

The Emerald Bay residential project developed by China Evergrande in the Tuen Mun district of the New Territories in Hong Kong, China, on Friday, July 23, 2021.

Lam Yik | Bloomberg | Getty Images

Chinese property giant Evergrande is on the brink of collapse, and analysts warn the potential fallout could have far-reaching implications that spill outside China’s borders.

“Evergrande’s collapse would be the biggest test that China’s financial system has faced in years,” says Mark Williams, chief Asia economist at Capital Economics.

Here’s how bad its problems are, and what’s in store for investors.

How did we get here?

After expanding rapidly for years and snapping up assets as China’s economy boomed, Evergrande is now snowed under a crushing debt of $300 billion.

The world’s most indebted property developer has been scrambling to pay its suppliers, and warned investors twice in as many weeks that it could default on its debts.

On Tuesday, Evergrande said its property sales will likely continue to drop significantly in September after declining for months, making its cash flow situation even more dire.

The Chinese developer is so huge that the fallout from a potential failure could hurt not only the Chinese economy, but spread to markets beyond.

 

Evergrande’s collapse would be the biggest test that China’s financial system has faced in years.

Mark Williams

Capital Economics, chief Asia economist

Banks have also responded to its deteriorating cash flow. Some in Hong Kong, including HSBC and Standard Chartered, have declined to extend new loans to buyers of two uncompleted Evergrande residential projects, said Reuters.

Ratings agencies have repeatedly downgraded the firm, citing its liquidity problems. Evergrande’s problems intensified last year when China introduced rules to rein in the borrowing costs of developers. Those measures place a cap on debt in relation to a firm’s cash flows, assets and capital levels.

Evergrande stock performance (HKD) year-to-date

Evergrande stock (Hong Kong-listed)

Feb ’21Mar ’21Apr ’21May ’21Jun ’21Jul ’21Aug ’21Sep ’21051015cnbc.com

Its share price plunged nearly 80% so far this year, and trading of its bonds was repeatedly halted by Chinese stock exchanges in the past weeks.

What does Evergrande do?

Evergrande is everywhere. Its main business is in real estate, and it’s China’s second-largest property developer by sales.

• Evergrande owns more than 1,300 real estate projects in over 280 cities in China.
• Its property services management arm is involved in nearly 2,800 projects across more than 310 cities in China.
• The company has seven units dabbling in a wide range of industries, including electric vehicles, health-care services, consumer products, video and television production units and even a theme park.
• The firm says it has 200,000 employees, but indirectly creates more than 3.8 million jobs every year, according to its website.
• Evergrande’s shares and bonds are included in indexes across Asia.

Who will be affected?

The pool of affected parties include banks, suppliers, home-buyers and investors.

Evergrande warned this week its escalating troubles could lead to broader default risks.

It said that if it can’t repay its debt, it may lead to a situation of “cross default” — where a default triggered in one situation may spread to other obligations, leading to broader contagion.

 

A banking failure triggered by the collapse of major property developers was the single most likely scenario that could lead to a hard landing in China.

Mark Williams

Capital Economics, chief Asia economist

1. Banks

The banking industry would be among the first to be hit if there are any contagion effects on the wider property sector in China, said Williams of Capital Economics.

“A banking failure triggered by the collapse of major property developers was the single most likely scenario that could lead to a hard landing in China. And the fact that financial markets aren’t currently signaling alarm doesn’t mean they won’t,” Williams wrote in a note last week.

2. Homebuyers and investors

Protests by angry homebuyers and investors broke out in recent days in some cities, and social unrest is among the concerns.

On Monday, around 100 investors turned up at Evergrande’s headquarters in Shenzhen, demanding repayment of loans on overdue financial products — forming chaotic scenes, according to Reuters.

Read more about China from CNBC Pro

Singapore’s top lender picks Chinese stocks for ‘bottom fishers’

Morgan Stanley picks out high-conviction China stocks

Mark Mobius: China’s regulatory crackdown is creating investment opportunities

In fact, sentiment is already spreading to Asia high yield bonds. Yields on Asian offshore bonds, dominated by property firms, have spiked to an average of 13%, according to TS Lombard.

That also means offshore investors are at the losing end, the research firm said in a note last week.

“The company’s guarantee to deliver all pre-sold projects is likely to lead to overseas stakeholders seeing little, if anything, from the ultimate sale of a developer’s assets in the event of a bailout,” said TS Lombard.

“Hence the prospect of an unequal swap, where the interests of on-shore lenders – households and banks – are protected at the expense of equity and off-shore bondholders,” the note said.

3. Suppliers

The implications of Evergrande’s failure could also reverberate through to other industries if suppliers are not paid. According to S&P Global Ratings, Evergrande might be “trying to persuade” its suppliers and contractors to accept physical properties as payment — in a bid to preserve cash for loan repayments.

 

I believe there will be some supporting measures from the central government, or even the central bank, trying to bail out Evergrande.

Dan Wang

economist, Hang Seng Bank

In an August report, S&P estimated that over the next 12 months, Evergrande will have over 240 billion yuan ($37.16 billion) of bills and trade payables from contractors to settle — around 100 billion yuan of that amount is due this year. 

A paint supplier to Evergrande, Shanghai-listed Skshu Paint, said in a filing that the real estate firm repaid part of its debt in properties – and uncompleted ones at that.

Ratings agency Fitch said banks may also have indirect exposure to Evergrande’s suppliers — the developer’s trade payables stood at 667 billion Chinese yuan, according to Fitch analysis.

Is Evergrande too big to fail?

The government is likely to step in due to how important Evergrande is, according to analysts.

“Evergrande is such an important real estate developer, and it would be a strong signal if anything happened to it,” said Dan Wang, an economist at Hang Seng Bank. “I believe there will be some supporting measures from the central government, or even the central bank, trying to bail out Evergrande.”

But a restructuring could be more likely, according to other analysts.

“The most likely endgame is now a managed restructuring in which other developers take over Evergrande’s uncompleted projects in exchange for a share of its land bank,” Williams of Capital Economics said in a note last week.

It’s likely that the government will prioritize homebuyers and banks over other parties, he said.

“Policymakers’ main priority would be the households that have handed over deposits for properties that haven’t yet been finished. The company’s other creditors would suffer,” Williams wrote.

Investment bank Natixis said the Chinese government will avoid “systemic risks” in the lead-up to the 2022 National Congress of the Chinese Communist Party, given its historical importance.

“However, this would also imply China Evergrande’s debt crisis may snowball down the road,” the bank said in a note, adding that economic growth will not mitigate financial losses as was the case in the past.

Tell ya what, this recession in China might be smashing the price that Australia receives for our iron ore, but it's still damn nice to watch the supposed "economic miracle" come crashing down on Mr Xi's head  I would love to know where the Chinese govt is going to get the money to bail out their property sector. Think they spent every cent already on the military and the BRI?

[turbguy + 1,544]

2 hours ago, Wombat1 said:

 I would love to know where the Chinese govt is going to get the money to bail out their property sector. Think they spent every cent already on the military and the BRI?

Either borrow it, or print it.

[ronwagn + 6,290]

I have two very good sources for information on the many weaknesses or potential weaknesses of China. One is from an Indian source and the other I haven't figured out yet. These are videos, which I don't normally share because I prefer reading. I do follow many good video sources however.

https://www.youtube.com/c/TFIglobal From India. Propaganda, but very informative if overstated. 

Here is their print link. https://tfiglobalnews.com/2021/09/16/one-year-of-abraham-accords-trumps-pillar-of-friendship-withstood-the-attacks-of-war-mongering-biden/

https://www.youtube.com/channel/UC_gUM8rL-Lrg6O3adPW9K1g

https://www.youtube.com/watch?v=oGWXJ-0PHp0

 

 

[RichieRich216 + 454]

FUCK THEM! 

[ronwagn + 6,290]

Who? Why?

[ronwagn + 6,290]

41 minutes ago, turbguy said:

Either borrow it, or print it.

I need an analysis of their economic prospects versus ours. We  need to stop raising the debt limit and it can be stopped if reasonable people vote wisely in congress. The Democrats are in total control of their budget and overspending hopes. 

[Wombat1 + 33]

30 minutes ago, ronwagn said:

I have two very good sources for information on the many weaknesses or potential weaknesses of China. One is from an Indian source and the other I haven't figured out yet. These are videos, which I don't normally share because I prefer reading. I do follow many good video sources however.

https://www.youtube.com/c/TFIglobal From India. Propaganda, but very informative if overstated. 

Here is their print link. https://tfiglobalnews.com/2021/09/16/one-year-of-abraham-accords-trumps-pillar-of-friendship-withstood-the-attacks-of-war-mongering-biden/

https://www.youtube.com/channel/UC_gUM8rL-Lrg6O3adPW9K1g

https://www.youtube.com/watch?v=oGWXJ-0PHp0

 

 

Thanks for the links Ron, I have been in contact with Indian military commanders on Twitter and been watching lectures by their military strategists on the TV for a few months now. I actually came up with the idea to create the QUAD some years ago when Obama was in power, but only now has it become very useful. My own stupid govt (Labour under Kevin Rudd of course), actually withdrew temporarily from the QUAD back in 2012 or thereabouts, and India was rightly skeptical about letting Australia rejoin it until Covid came along. The whole thing is steaming ahead now and just the other day, the UK and USA allowed Australia to access tech for nuclear powered subs and created AUKUS. We have just cancelled the order for French subs.

[Wombat1 + 33]

49 minutes ago, turbguy said:

Either borrow it, or print it.

Don't like their chances of borrowing it, so I guess they will print it but am not sure how that would affect their currency. Whether it would crash and spark a war.

[Wombat1 + 33]

12 minutes ago, ronwagn said:

Who? Why?

Hopefully he meant the Chinese Communist Party members

[Strangelovesurfing + 737]

1 hour ago, Wombat1 said:

Don't like their chances of borrowing it, so I guess they will print it but am not sure how that would affect their currency. Whether it would crash and spark a war.

According to Peter Zeihan, China has ~$35 trillion of currency in circulation. The US is currently at ~$20 trillion in circulation. The US has roughly the same in circulation as GDP, China is ~2.5x more than GDP, those numbers include recent money printing as of ~4 months ago.

Those are metrics I see being thrown around, not sure how/why they matter but people like to site them. We're going to see what matters soon for Chia, can they print forever? We're about to see MMT in action like nobody's business.

Of course GDP growth this year will still be reported @ 6% 😂.

[turbguy + 1,544]

1 hour ago, Wombat1 said:

Don't like their chances of borrowing it, so I guess they will print it but am not sure how that would affect their currency. Whether it would crash and spark a war.

They (the CCP) can buy new "senior" bonds of Evergrande.

Find a way to hide them from the balance sheet.

And take over the properties.

And let the value of "less senior" public holdings shrink as the market allows.

The value of the assets of the CPP is REALLY BIG.
 

Edited September 18, 2021 by turbguy

[Jay McKinsey + 1,490]

5 hours ago, Strangelovesurfing said:

According to Peter Zeihan, China has ~$35 trillion of currency in circulation. The US is currently at ~$20 trillion in circulation. The US has roughly the same in circulation as GDP, China is ~2.5x more than GDP, those numbers include recent money printing as of ~4 months ago.

Those are metrics I see being thrown around, not sure how/why they matter but people like to site them. We're going to see what matters soon for Chia, can they print forever? We're about to see MMT in action like nobody's business.

Of course GDP growth this year will still be reported @ 6% 😂.

MMT only applies to the world reserve currency, currently the US dollar.

[turbguy + 1,544]

Anybody here shorting China?

[KeyboardWarrior + 527]

3 hours ago, turbguy said:

Anybody here shorting China?

What's the best thing to short when betting against China? Currency? 

[Wombat1 + 33]

19 hours ago, Strangelovesurfing said:

According to Peter Zeihan, China has ~$35 trillion of currency in circulation. The US is currently at ~$20 trillion in circulation. The US has roughly the same in circulation as GDP, China is ~2.5x more than GDP, those numbers include recent money printing as of ~4 months ago.

Those are metrics I see being thrown around, not sure how/why they matter but people like to site them. We're going to see what matters soon for Chia, can they print forever? We're about to see MMT in action like nobody's business.

Of course GDP growth this year will still be reported @ 6% 😂.

Indeed, most Westerners think of the Chinese as "conscientious savers", but in actual fact, if you delve into history you discover that they actually invented paper money and have an unbeaten track record of financial crises after financial crises  They usually turn inwards and collapse on themselves, but Mr Xi is trying his darndest to break the mould and copy Hitler, whilst hoping for a more successful result. Mr Xitler also thinks he has a pact with the Russians.... Yawn. Putin says that he likes to be a monkey watching 2 tigers fight. Thing is, the Chinese Tiger is not up against just the American Tiger, but also the Indian Tiger plus the British, Australian, Canadian, and Japanese Hyenas. Poor Xitler, I can just about hear him crying. Hopefully the CCP have the brains to depose him before we do. They will become "collateral damage" if they fail. 

[Wombat1 + 33]

1 hour ago, KeyboardWarrior said:

What's the best thing to short when betting against China? Currency? 

Nope, the Australian dollar. It is already on the slide. 72 US cents, should fall to about 65 cents within a year but doesn't worry us too much coz we ain't allowed to travel anyway  

[turbguy + 1,544]

They got loans from their own employees??

That was clever.

Now, how do they get the cash back?

https://www.nytimes.com/2021/09/19/business/china-evergrande-debt-protests.html?campaign_id=2&emc=edit_th_20210920&instance_id=40827&nl=todaysheadlines&regi_id=54533837&segment_id=69383&user_id=68525f6837d33eab7f1facce57a96994

[ronwagn + 6,290]

On 9/17/2021 at 7:18 PM, Strangelovesurfing said:

According to Peter Zeihan, China has ~$35 trillion of currency in circulation. The US is currently at ~$20 trillion in circulation. The US has roughly the same in circulation as GDP, China is ~2.5x more than GDP, those numbers include recent money printing as of ~4 months ago.

Those are metrics I see being thrown around, not sure how/why they matter but people like to site them. We're going to see what matters soon for Chia, can they print forever? We're about to see MMT in action like nobody's business.

Of course GDP growth this year will still be reported @ 6% 😂.

I don't have the actual figures but would love to have references. I did read that WE recently added 13 trillion dollars to our money pump! I don't know over how long a period that occurred, or if that is correct. 

[ronwagn + 6,290]

On 9/17/2021 at 7:40 PM, turbguy said:

They (the CCP) can buy new "senior" bonds of Evergrande.

Find a way to hide them from the balance sheet.

And take over the properties.

And let the value of "less senior" public holdings shrink as the market allows.

The value of the assets of the CPP is REALLY BIG.
 

Do you  think that the CCP can manage their assets as well as real businessmen? I stongly doubt it. 

[ronwagn + 6,290]

On 9/18/2021 at 12:34 AM, Jay McKinsey said:

MMT only applies to the world reserve currency, currently the US dollar.

Please explain? Every nation handles their own debt problems and most seem to be using MMT. Japan is a prime example and it has been a real problem. We are doing the same and it will get worse soon if we keep raising the debt ceiling. Republicans could refuse to raise it. 

[turbguy + 1,544]

50 minutes ago, ronwagn said:

Do you  think that the CCP can manage their assets as well as real businessmen? I stongly doubt it. 

You mean the way Wall Street real businessmen handled mortgage based debt in the 2000's?

That worked out really well, no?

You and I had to step in and fix that mess...

All China has to do is assume Evergrande's $300 Billion in debt by some mechanism.  Doesn't sound that difficult to me.

How much do you think the naming rights would go for, for Yellowstone National Park?

How much do you think Yellowstone National Park would bring on the open market?

Edited September 20, 2021 by turbguy

[ronwagn + 6,290]

That mess was the fault of federal rules that forced banks to lend to unqualified buyers. Then the banks were able to package and sell the deeds to others. The market prices of homes went up because of the easy lending so even qualified buyers suffered. 

I think that the National Park Service and National Forests are underfunded and woefully managed. I have been to Yellowstone and every National Park and many of the smaller ones. Many National Forests also. 

My objections are:

Very poor forestry used in the national forests allowing the fires we have seen. This is mainly due to political pressure to keep the forest floors natural. Nature allows forests to burn until they burn out or it rains. Good forestry keeps space between trees by cleaning up the forest floor to some extent and thinning out overgrowth of small trees allowing good specimens to flourish. It is much more attractive but not natural. Natural is non nearly as attractive as a parklike, hikeable, and beautiful landscape. Natural can be kept in rainforests where the likelyhood of fires is very low. It is beautiful in Olympic National Park. You can see a row of new trees on a fallen giant behemoth tree.

National Forests are for multiple use. That includes about whatever they decide can happen there. That is influenced by politics. Forests should be used for growing timber to market but saving the most beautiful stands of old growth and the areas surrounding trails, lakes etc. I do not support clear cutting large areas but support checkerboard cutting which is very supportive of deer and other wildlife. Immediate new tree planting should take place. Forty years later ( or whatever is appropriate) then they are harvested again. I think that all of the national forest should be accessible but think that sometimes ranchers think they own the area where they are allowed to graze their livestock and it should be understood that it is not their land, it belongs to the public.

National Parks are almost all overcrowded without enough parking places anywhere in the parks. Not enough access to trails due to not enough parking. Forcing people to take busses to see the parks. Not enough roads so that people not able to backpack can't really see much. Dogs not allowed on the trails. 

Both National Parks and Forests crowd campers into one spot at a time until jammed full so you end up bing crowded into a little forest ghetto. Lately everyone has to wear a mask near anyone else. 

The rangers do a good job overall but the leaders at the top do not really want to open things up to the public which has a population ten times larger than when the system was set up and everyone now has a car. Time to help the owners of the parks and forests get better access!

Edited September 21, 2021 by ronwagn
spelling

[Strangelovesurfing + 737]

4 hours ago, ronwagn said:

I don't have the actual figures but would love to have references. I did read that WE recently added 13 trillion dollars to our money pump! I don't know over how long a period that occurred, or if that is correct. 

The ~$35 trillion number was from one of Zeihan's more recent YouTube videos.

Here's a couple screen shots of M2 supply going back 25 years according to www.tradingeconomics.com. It matches up with Zeihan. 

 

Edited September 20, 2021 by Strangelovesurfing