Commentary on Political Economy

Wednesday, 22 September 2021

THE FRANCISCAN FRIAR IS MAD AGAINE!

Evergrande fallout could be worse than Lehman for China, Jim Chanos warns

Crisis at property developer ‘symptomatic’ of broader woes in world’s biggest emerging market, short seller says

Jim Chanos pictured in Las Vegas in 2017

Jim Chanos, pictured here in 2017, said: ‘There’s lots of Evergrandes out there in China — Evergrande just happens to be one of the biggest’ © Bloomberg

   

September 22, 2021 1:00 pm by Harriet Agnew , Asset Management Editor

Evergrande’s crisis could be “far worse” for investors in China than a “Lehman-type situation” because it points to the end of the property-driven growth model in the world’s second-largest economy, short seller Jim Chanos said.


“There’s lots of Evergrandes out there in China — Evergrande just happens to be one of the biggest,” Chanos, best-known for predicting the collapse of energy group Enron, told the Financial Times. “But all the developers look like this. The whole Chinese property market is on stilts,” the founder of New York-based hedge fund Kynikos Associates said in an interview.


Concerns over the world’s most indebted developer have sparked drops in global markets this week as investors worry about the potential fallout as the group struggles to meet a debt payment on one of its international bonds due on Thursday. Such a default, some say, could cascade across the broader Asian corporate debt market.



The real estate company said a domestic payment due on Thursday had “already been resolved” but provided no indication of whether it would pay offshore investors, which include several major international asset managers.


Investors broadly agree that Evergrande’s unravelling will not hurt global banks and investors in the way Lehman Brothers’ failure did in the financial crisis, as its international debt load, at about $20bn, is relatively small.


But its total liabilities stand at more than $300bn, due largely to creditors and businesses in mainland China. Chanos is among those warning that the economic impact in the country from a wider series of non-payments could be severe. “In many ways you don’t have to worry that it’s a Lehman-type situation but in many others it’s far worse because it’s symptomatic of the whole economic model and the debt that’s behind the economic model,” the 63-year-old said.


Last year President Xi Jinping took steps to address years of chronic oversupply in Chinese property, and Beijing drafted new rules to constrain leverage in the sector, which directly and indirectly contributes 29 per cent of the country’s gross domestic product. 


“If you try to deflate this bubble, it is fraught with risks,” said Chanos. “I don’t think they’re contagion risks. This is not a Lehman-type situation where there is contagion interbanks and intra-banks and everybody stops lending to everybody else. This is more a risk to the economic model because residential real estate is still such a huge part of GDP there.”


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Evergrande and the end of China’s ‘build, build, build’ model

Chanos said the country would need to find “new growth drivers, or downshift somewhat semi-permanently into a lower level of growth”.


“Has the Chinese Communist party grappled with the implications of that? That remains to be seen,” he added.


Short-selling funds such as Kynikos have fallen from favour in the long upbeat run in markets since the financial crisis, which was punctured only briefly by the Covid-19 pandemic in 2020. Assets managed by Kynikos have shrunk below $1bn after peaking at about $7bn more than a decade ago.


China forms a growing part of Chanos’s strategy. Kynikos has doubled its exposure to China in its global short fund to more than 10 per cent over the past year, including adding small short positions in HSBC and Standard Chartered, “due to their heavy loan exposure to Greater China”. Both banks are listed in London but derive the bulk of their profits from Asia. HSBC and StanChart declined to comment.


Last year Chanos placed a bet against Luckin Coffee, once touted as China’s answer to Starbucks, after rival short seller Carson Block of Muddy Waters encouraged him to look at it. The company was subsequently investigated for accounting fraud and Chanos closed out his short position at a profit following a big drop in its share price.


Chanos said he was also short casino group Wynn Resorts, which derives much of its cash flow from Macau, the world’s biggest gambling hub. “We think that the crackdown on Macau has just started,” he said. Last week, casino stocks suffered their worst day ever as authorities announced a review of gaming laws. 


Let those cowardly Europeans freeze this winter! That will teach them!


 & Gas industry

US vows to ‘stand up’ to alleged gas market manipulation in Europe

Energy secretary Jennifer Granholm said spike in prices raises ‘serious concerns’ about supply

Jennifer Granholm

Jennifer Granholm: ‘We are united with our European allies in making sure you get adequate, affordable gas supply this winter’ © Joe Klamar/AFP via Getty Images

   

September 22, 2021 1:56 pm by Henry Foy in Brussels and Max Seddon in Moscow

The US has vowed to support European countries hit by an energy supply crunch blamed on Russia and to “stand up” to suppliers accused of manipulating prices.


Surging gas costs due to tight supply and low reserves have forced European governments to draw up plans to provide emergency aid to households and utilities. Officials and traders have warned that moves by Kremlin-controlled energy giant Gazprom to restrict supply could cause a crippling energy crisis this winter.


US energy secretary Jennifer Granholm said the spike in prices had “raised serious concerns and questions on the reliability of the existing supply and security in Europe”.



“We and our partners have to be prepared to continue to stand up where there are players who may be manipulating supply in order to benefit themselves,” she added.


Russia is Europe’s biggest supplier of gas and accounts for about 40 per cent of imports. Gazprom has fulfilled its long-term contracts to European customers but has restricted additional top-up sales, while allowing its own storage facilities in Europe to fall to low levels.


“Clearly we want to all have our eye on the issue of any manipulation of gas prices by hoarding or the failure to produce adequate supply,” Granholm told reporters while on a visit to Warsaw. “We are looking at this very seriously and we are united with our European allies in making sure you get adequate, affordable gas supply this winter,” she added.


Energy supplies have become a hugely sensitive geopolitical issue between Europe, the US and Russia, given Europe’s historic reliance on Moscow and the collapse in relations over the past decade. The US has long called for European countries to diversify their gas imports and warned that it leaves the continent vulnerable to Kremlin leverage. It is unclear what the US could do to increase pressure on Russian suppliers.


Washington has vehemently opposed the Nord Stream 2 pipeline recently completed from Russia to Germany, saying it will only deepen dependence on Moscow. The pipeline bypasses Ukraine, depriving it of transit fees, and contractors on NS2 were previously subject to US sanctions. Gazprom and Kremlin officials have said Russia could boost gas sales once Germany and the EU approve the start-up of the pipeline, adding to suspicions that it has restricted sales in order to try to accelerate the decision.


The Kremlin has suggested that the current supply crunch proves the need for more pipelines. Dmitry Peskov, president Vladimir Putin’s spokesman, said on Wednesday that Europe needed to buy more gas from Russia if it wanted to increase transit flows via Ukraine.


“There’s a very simple truth: first you sell gas, then you extract it, and only after that do you transit it. You can’t transit gas without selling it,” Peskov said, according to Interfax.


Gazprom is already supplying close to a record amount of gas to Europe and fulfilling its contractual obligations “at 100 per cent and even more”, Peskov added. He blamed the surging prices on the spot market, which Russia says is more expensive than concluding long-term pipeline deals.


“They [the EU] prefer to make a lot of emphasis on the spot market. But it’s the spot market that leads to this abrupt, galloping rise in prices,” Peskov said.


Granholm’s comments follow a demand from the International Energy Agency for Russia to increase supply to Europe, and a demand by members of the European Parliament for Brussels to launch an investigation into Gazprom’s actions. 


Tony Boyd ought to read Bartholomewsz's analysis...and hang his head in shame:


The tip of the iceberg?

In China, Evergrande’s implosion might not trigger a Lehman moment – it isn’t as connected to the core of China’s banking and financial system as US investment bank Lehman Bros was at its meltdown – but the real estate giant is heavily connected to the property development supply chain and its financing.


Without government intervention it will collapse, and its $US300 billion-plus of liabilities will wipe out suppliers, property investors and aspiring owners.


Bond investors, retail investors in wealth management products that helped fund the company’s developments and its own employees’ savings (the employees were “encouraged” to help fund its projects) will lose heavily. Bank losses on its $US90 billion of loans would be substantial, but not of systemic consequence.


Still, there is potential for an Evergrande collapse to spread contagion through an overly-leveraged and over-built Chinese property sector and its wider supply and financing chain. Property development has been at the heart of China’s growth over the past decade.


With interests well beyond its 1300 property developments and big property services business - from banking, life insurance, electric vehicles and sporting clubs to food, tourism and leisure – the group also bears similarities to other sprawling large Chinese conglomerates like HNA and Huarong that essentially failed.


When the question is posed as to whether Evergrande represents the tip of an iceberg, it’s not just the property sector that should be looked at. The larger question is how many more of these highly-leveraged entities with wildly non-synergistic assets there might be in China after more than a decade of debt-fuelled and turbo-charged growth.


There are some broad similarities between the development in China’s corporate sector, and the way the authorities responded to HNA, Huarong and some other corporate crises, and what happened in Japan in the late 1980s and early 1990s when the vertically-integrated and incestuous nature of its corporate sector combined with a property boom and bust to cast the country into three decades of economic winter.


China’s crackdown

China isn’t in as vulnerable a position as it has massive reserves and the power of an authoritarian government to call on. But it is overly-leveraged, its state-owned or controlled enterprise sector contains some sprawling conglomerates with questionable financial discipline, and there is an opacity to both its economic data and corporate accounts that makes it difficult to determine, or discipline, risk.


The authorities have clearly been concerned about the property sector and indebtedness more generally.

Several years ago, before they were interrupted temporarily by the pandemic, they started to clamp down on leverage in the property sector and began to deflate the property bubble created by the prolonged period of loose credit and strong growth that started with China’s response to the 2008 financial crisis.


Evergrande’s implosion has the potential to spread to the wider economy.

Evergrande’s implosion has the potential to spread to the wider economy.CREDIT:BLOOMBERG


More broadly, Xi Jinping’s crackdown on big tech, private education and capitalism generally appears to be a response to excesses as well as a threat to the Communist Party’s absolute control.


By itself, that dramatic reset of the relationship between the state and China’s businesses would create uncertainty and increased corporate risk. That it is happening at the same time as the authorities have been trying to engineer a deleveraging and decarbonising of the economy adds to the degree of difficulty and the risk.


It is probable that the authorities will bail out some of the participants in Evergrande, although probably not the bond holders.


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Stephen Bartholomeusz

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They want to reduce the moral hazard in their system, which means demonstrating to investors that companies, whether privately or state-owned, are not too big to fail.


But that will have an impact on the willingness of investors, particularly foreign investors, to fund Chinese companies, and not just property companies, with Evergrande only the most recent of an accelerating spate of defaults on bonds by Chinese entities over the past 12 months.


For whatever reason, markets have historically been more volatile and brittle in the September/October period and the confluence of events in the US and China, overlaid by continuing significant geopolitical tensions and the pandemic almost ensures that this year will be no different.


What the Fed does, this week or at least before the end of the year; whether the pandemic is brought more firmly under control; how and when China resolves the Evergrande challenge; how its economic model continues to evolve and whether and how the geopolitical stresses are defused will all shape not just the next few weeks or months, but the next few years at least.


The above headline refers to a true conclusion I have argued for years - including with regard to the Soviet Union, in the Melbourne Uni Farrago paper in the early 80s when Reagan announced the Star Wars program. I recall that at the time I was one of the very few to reach that conclusion from very basic information available. It's gratifying to see there are still commentators with a scintilla of insight around!

Nice dig at Rudd in The Australian. Disappointed that Keating was spared!


Vindication from those who went nuclear over subs deal


Sometimes the best examples of vindication for a major shift in defence policy are the irrational outbursts of those opposing it, and the reaction to the newly formed AUKUS tripartite pact is proof of that. To begin with, Chinese Foreign Ministry spokesman Zhao Lijian said last week Australia would “only end up hurting their own interests” if the country did not abandon the “cold war mentality”.


Zhao, incidentally, is that measured and urbane chap who last year tweeted a doctored image of an Australian soldier slitting the throat of an Afghan child. His concerns about AUKUS have been parroted by North Korea. Having just last week tested long-range cruise and ballistic missiles and reportedly resuming operation of the Yongbyon nuclear reactor earlier this month, Pyongyang characterised AUKUS as “destroying the peace and stability of the region”.


Speaking of Australia’s decision to acquire eight nuclear submarines, the Indonesian Foreign Ministry released a statement saying it was “watching with caution,” adding it “calls on Australia to maintain its commitment towards regional peace, stability and security in accordance with the Treaty of Amity and Cooperation”. That’s rich given Jakarta intends increasing its number of submarines to 12.


‘Floating Chernobyls’ unwelcome


They’re not the only neighbour waving the finger. “Certainly, they couldn’t come into our internal waters,” said New Zealand Prime Minister Jacinda Ardern said last Thursday when asked about Australia’s future submarines. Her declaration would surely rate as our least relevant consideration unless the landlocked nation of Laos announces a similar prohibition.


NZ Prime Minister Jacinda Ardern. Picture: Robert Kitchin/Getty Images

NZ Prime Minister Jacinda Ardern. Picture: Robert Kitchin/Getty Images

Sadly, Greens leader Adam Bandt did not react well to the news the Royal Australian Navy will reduce its CO2 emissions by replacing diesel electric submarines with nuclear powered ones. It was a case, he repeatedly maintained, of putting “floating Chernobyls in the heart of Australia’s cities”. Something or rather someone was having a meltdown, but it wasn’t the RAN.


That’s not to say defence doesn’t appear in the Greens’ policies. If you look hard enough on their website, you will see it gets a mention in parentheses alongside the ‘Peace & Disarmament’ portfolio. I was surprised it received even token acknowledgment.


‘Stab in the back’


When Greens senator Sarah Hanson-Young’s office released a statement condemning the federal government’s decision to commission nuclear submarines, she was in denial about China’s aggressive expansionism. “The real security threat we face is the climate crisis and that’s where PM [Scott] Morrison should be directing his energy,” she said.


But the biggest stink of all – one might say the Pepé Le Pew of stinks – comes from the French government. “It’s really a stab in the back,” said the French foreign minister, Jean-Yves Le Drian, last week. “We had established a relationship of trust with Australia; this trust has been betrayed,” he told France Info radio on Thursday. This was a case of “treason in the making,” said French ambassador Jean-Pierre Thebault only hours before his government recalled him for consultations. “We have been blindsided intentionally for 18 months …. The crime was prepared for 18 months.”


Greens leader Adam Bandt. Picture: Jay Town

Greens leader Adam Bandt. Picture: Jay Town

That the Turnbull government signed a $92bn contract for 12 French-designed Attack-class submarines is fact. But it does not follow that Australia’s cancellation of this agreement amounts to reneging on or otherwise breaching the contract. The Australian National Audit Office has confirmed the agreement provided for escape clauses and “contractual off-ramps”. What’s more, as the ABC reported in 2019, the overarching contract provided the French company Naval Group would be paid $404m in the event it “delivered a detailed submarine design and Australia then chose to go no further”. They will not go empty-handed.


Not that this will assuage French anger one bit. The real issues are the damage to French prestige, the perception – not entirely unjustified – that Morrison had played President Emmanuel Macron for a fool, and the demise of France’s Indo-Pacific strategy to safeguards its territories in that region. But as Editor-at-Large Paul Kelly observed yesterday, Morrison was in an invidious position in that he had to keep his nuclear negotiations secret and the increasingly beleaguered French project as a fallback.


France is not without its Australian supporters. “It is unusual for a former prime minister of a country to criticise the decisions of a successor prime minster in the opinion pages of a foreign newspaper,” wrote one Kevin Rudd in Le Monde this week. It is unusual unless you are an incessant and egotistical critic of successor prime ministers, you might quip in response. Morrison, he claimed “failed to adhere to basic diplomatic protocols in not officially notifying the French government of its unilateral decision prior to the public announcement of the cancellation of the contract”.


French President Emmanuel Macron. Picture: AFP

French President Emmanuel Macron. Picture: AFP

He may as well have said “My name’s Kevin, and I’m a stickler for notifying stakeholders about crucial naval developments”. You might remember during Rudd’s election campaign of 2013 when he announced on the run his plan to move the RAN’s headquarters from Sydney to Queensland. How awkward for Rudd when soon after that he happened upon then NSW premier Barry O’Farrell in view of Garden Island. “Good morning, Kevin. A phone call would have been helpful,” said a polite but peed off O’Farrell, much to Rudd’s embarrassment.


Selective memory


But for all its talk of Australia betraying a friend, France has conveniently forgotten its treatment of this country. Between 1966 and 1974, it conducted 41 atmospheric nuclear tests at Mururoa Atoll, despite the protests of Australia and New Zealand.


In 1973, when then prime minister Gough Whitlam sought an injunction against testing in the International Court of Justice, France indicated it would ignore the ruling. “If there is nothing wrong with the tests, why don’t the French save money and hold them in Corsica,” said an exasperated Whitlam when France claimed the detonations were “clean” and presented no health danger.


In 1995 French president Jacques Chirac ordered the resumption of nuclear testing, and once again, protests were ignored. The French ambassador to Australia even took leave to holiday in France at one stage during the tests. As the Canberra Times reported in December of that year, the Department of Foreign Affairs had to settle for summoning the embassy’s charge d’affairs, who “clearly was not fazed”.


But that is all in the past, right? Wrong. In March this year France supported the Italian government’s decision to stop the shipment of 250,000 AstraZeneca doses destined for Australia to ensure EU countries were given priority. As international news service France 24 reported “French health minister Olivier Véran said he ‘understood’ the Italian’s government decision and indicated France ‘could do the same’.”


The acquiring of nuclear submarines and the co-founding of AUKUS could well be the most significant defence initiative made by an Australian government this century. As for France’s angst towards Australia, one need only remind its government of former foreign minister Hervé de Charette and his response in 1995 to fellow EU nations that condemned France for resuming its nuclear tests.


“As far as the reaction of other governments is concerned, I can tell you that France will not bend when it comes to the defence of its national interests,” he declared. Monsieur, please convey to your successor that we are merely adopting your country’s example.


But I have to agree with Chanos against Dalio the "abbaglio" (Italian for "blinded") that China is a moving wreck. I lined this FT interview earlier, but here is a better version:


China’s property market ‘built on stilts’, warns Jim Chanos

Harriet Agnew

first published at 9.28am

New York | Evergrande’s crisis could be “far worse” for investors in China than a “Lehman-type situation” because it points to the end of the property-driven growth model in the world’s second-largest economy, said short-seller Jim Chanos.


“There’s lots of Evergrandes out there in China — Evergrande just happens to be one of the biggest,” Mr Chanos told the Financial Times in an interview “But all the developers look like this. The whole Chinese property market is on stilts,” said the founder of New York-based hedge fund Kynikos Associates who is best known for predicting the collapse of energy group Enron.



Jim Chanos: “There’s lots of Evergrandes out there in China — Evergrande just happens to be one of the biggest.” Bloomberg

Concerns over the world’s most indebted developer have sparked drops in global markets this week as investors worry about the potential fallout if Evergrande does not meet a debt payment on one of its international bonds due on Thursday. Such a default, some say, could cascade across the broader Asian corporate debt market.


The real estate company said a domestic payment due on Thursday had “already been resolved” but provided no indication of whether it would pay offshore investors, which include several major international asset managers.


Investors broadly agree that Evergrande’s unravelling will not hurt global banks and investors in the way Lehman Brothers’ failure did in the financial crisis, because its international debt load, at about $US20 billion ($27.6 billion), is relatively small.


But its total liabilities stand at more than $US300 billion, due largely to creditors and businesses in mainland China.


Mr Chanos is among those warning that the economic impact in the country from a wider series of non-payments could be severe.


“In many ways you don’t have to worry that it’s a Lehman-type situation but in many others, it’s far worse because it’s symptomatic of the whole economic model and the debt that’s behind the economic model,” the 63-year-old said.


Last year President Xi Jinping took steps to address years of chronic oversupply in Chinese property, and Beijing drafted new rules to constrain leverage in the sector, which directly and indirectly contributes 29 per cent of the country’s gross domestic product.


“If you try to deflate this bubble, it is fraught with risks,” said Mr Chanos. “I don’t think they’re contagion risks. This is not a Lehman-type situation where there is contagion [within and between banks] and everybody stops lending to everybody else. This is more a risk to the economic model because residential real estate is still such a huge part of GDP there.”


Mr Chanos said the country would need to find “new growth drivers, or downshift somewhat semi-permanently into a lower level of growth”.


“Has the Chinese Communist Party grappled with the implications of that? That remains to be seen,” he added.


Short-selling funds such as Kynikos have fallen from favour in the long upbeat run in markets since the financial crisis, which was punctured only briefly by the COVID-19 pandemic in 2020. Assets managed by Kynikos have shrunk below $US1 billion after peaking at about $US7 billion more than a decade ago.


China forms a growing part of Mr Chanos’s strategy. Kynikos has doubled its exposure to China in its global short fund to more than 10 per cent over the past year, including adding small short positions in HSBC and Standard Chartered, “due to their heavy loan exposure to Greater China”. Both banks are listed in London but derive the bulk of their profits from Asia. HSBC and StanChart declined to comment.


The problem in all European countries with a Green Pass is that you need it the minute you land...But that leaves you no time even to get to your accommodation! It's bemusing to think what happens to tourists! I think tourism is virtually impossible now in all countries requiring a Pass because it will be impossible to get anything done even just to get the Pass!

They will need to introduce some way for tourists to obtain a Green Pass BEFORE they leave. That way tourists can be sure that they will be cleared to move and shop and so forth as soon as they land!


As you know, I truly like Evans-Pritchard. Here is his latest:


Evergrande’s near collapse marks the end of China’s economic miracle

By Ambrose Evans-Pritchard

September 23, 2021 — 10.30am

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The Chinese Communist Party can at any time stop the collapse of the Evergrande Real Estate Group mushrooming into a systemic financial crisis: it controls the banking system and has hegemonic sway over the transaction counterparties.


It is hard to imagine a Lehman denouement in such circumstances. Beijing would not flirt lightly with such a risk before next year’s 20th Party Congress, intended to be the coronation of Xi Jinping for life.


It has been a staple of party propaganda for the last 13 years that the US banking collapse in 2008 discredited the Western economic model (it didn’t), and that such a disaster could never happen in China’s version of Leninist state-capitalism. This raises the political bar.


The implosion of property giant Evergrande is testing nerves.

The implosion of property giant Evergrande is testing nerves.CREDIT:BLOOMBERG


But this episode is nevertheless fundamentally different from previous spasms of stress over the last 20 years, and it will test nerves. Xi Jinping is deliberately deflating the property bubble, deemed an economic cancer that is leading to dangerous inequality and is robbing resources away from China’s hi-tech ambitions. He has taken direct control over the purge from economic plenipotentiary Liu He, lately subjected to Maoist “rectification”, but without Liu He’s financial sensitivity.


What nobody knows in the West - and very few know in China - is how far Xi intends to go in punishing Evergrande and how far he intends to push his assault on moral hazard. The developers have $4.7 trillion ($6.5 trillion) of debt and few would be considered sound under Western accounting standards. Contagion has already engulfed Vanke, Country Garden, Sunac, and Kaisa, to name a few.


But assuming that this storm blows over, the underlying problem remains. China has overbuilt and over-borrowed for an ageing country with a declining workforce.


There has been an eerie silence from official Beijing for two weeks. The press is under a de facto gag order. Either there is no plan or regulators are trying to discover where Evergrande’s Jiayin Xu has hidden the dead bodies. Official liabilities are around $US300 billion, but the figures are opaque.


“There is always going to be more debt than we can see,” said Andrew Lawrence from TS Lombard.


Mr Lawrence once probed Evergrande on behalf of Western creditors, only to discover on site that most of the designated projects had not been started and that the money had been diverted to cover other costs.


The company was funding itself - like most Chinese developers - by pre-selling properties long before they were built. “They had massive negative free cash-flow and were basically borrowing to pay interests and taxes,” he said.


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China injects $26 billion into banking system during Evergrande crisis

‘Three Red Lines’

The trigger for the current squeeze was Xi’s “Three Red Lines” last year: a 70 per cent cap on liabilities to assets; a 100 per cent cap on net debt to equity; and enough cash to cover short-term debt. Developers that failed the tests lost access to credit, short-circuiting the perpetual Ponzi scheme. Evergrande responded the only way it could, by ramping up pre-sales even further until the music stopped.


Evergrande is not significantly more leveraged than its peers. It hit the buffers first because it relied heavily on short-term debt, like Northern Rock. “When the Three Red Lines were applied to 12 large developers last year, eight broke at least one, and four broke all three,” said Capital Economics.


“Other developers, which have a higher share of liabilities in the form of pre-sales and long-term borrowing, have so far avoided the same liquidity problems. But they too will come under growing pressure amid a deepening property downturn,” it said.


Danske Bank says Beijing will have to intervene to head off a domino effect and a severe financial crisis. But intervention can mean many things. Evergrande is the first real test case of Three Red Lines and more broadly a test of Xi Jinping’s war on “disorderly capital”. What is likely to emerge is a messy mixture that tries to decapitate and ring-fence Evergrande without giving others a licence to speculate.


What nobody knows in the West - and very few know in China - is how far Xi Jinping intends to go in punishing Evergrande.

What nobody knows in the West - and very few know in China - is how far Xi Jinping intends to go in punishing Evergrande.CREDIT:AP


Those who have pre-bought homes will top the creditor pecking order: largely protected in the name of social stability.


The big state lenders will be cushioned by central bank liquidity. Chinese investors who sank money into Evergrande through “wealth management products” will suffer haircuts. Bondholders on the offshore dollar market can kiss goodbye to $US19 billion. Shareholders and foreign “tourists” will get nothing. The authorities will lean on state banks to keep lending developers enough to stay afloat.


But assuming that this storm blows over, the underlying problem remains. China has overbuilt and over-borrowed for an ageing country with a declining workforce.


‘Sustained decline’

“The root of Evergrande’s troubles - and those of other highly leveraged developers - is that residential property demand in China is entering an era of sustained decline. Relaxation of regulatory controls wouldn’t change this fundamental constraint,” said Mark Williams, Asia chief at Capital Economics.


The cohort of young adults climbing on to the property ladder is shrinking. The number of marriages has dropped by 31 per cent since 2013. The migrant flow from the countryside has dried up. “We expect demand for new urban housing to halve over the next 10 years,” said Mr Williams.


Construction is near 15 per cent of GDP, more than double the US subprime peak, and far greater than the Spanish peak in 2007. The closest modern parallel is Japan’s bubble in the 1980s, when the imperial gardens in Tokyo were theoretically worth more than California.


Japan never had the spectacular crisis many feared, but it has been in a slow economic slide ever since, struggling with post-bubble debt deflation in an ageing society. That is likely to be China’s fate from now on.


‘Even the very cautious pragmatic Chinese regulators may not yet be fully anticipating the depth of the possible fall in China’s housing prices.’


Ken Rogoff and Yuanchen Yang

Harvard professor Ken Rogoff and Yuanchen Yang (now at the IMF), say Chinese property and construction amount to 29 per cent of GDP when all ancillary sectors are included. Housing makes up four fifths of personal wealth and land sales make 40 per cent of local government revenues.


They argue that this extreme dependence on the property nexus has not been tested because supercharged growth rates hide all sins. But China is no longer growing fast. Xi Jinping’s neo-Maoist ideology of “common prosperity” marks a profound break with the Deng Xiaoping catch-up model.


“We find that a 20 per cent fall in real estate activity could lead to a 5 per cent to 10 per cent fall in GDP, even without amplification from a banking crisis, or accounting for the importance of real estate as collateral,” they said.


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Stephen Bartholomeusz

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The US Federal Reserve’s Ben Bernanke once famously said “we’ve never had a decline in house prices on a nationwide basis” and nothing had substantially changed. But it had changed. The national Case-Shiller index would soon fall by 36 per cent.


The Rogoff-Yang paper said nothing should be assumed in the case of China either. “Even the very cautious pragmatic Chinese regulators may not yet be fully anticipating the depth of the possible fall in China’s housing prices,” it said.


Deflating an economy that is so hyper-leveraged to property is going to take years and will be untidy. China will almost certainly avert a Minsky crisis, but it may not avert a long grinding semi-slump that profoundly changes the world’s perception of the country.

The Telegraph, London

A special wreath for Suckers of the Decade goes to Western bondholders. If I had a say, after they lose their money, I would round up each and everyone of them...and line them up against a wall as "indecently stupid acts of treason"...


"The big state lenders will be cushioned by central bank liquidity. Chinese investors who sank money into Evergrande through “wealth management products” will suffer haircuts. Bondholders on the offshore dollar market can kiss goodbye to $US19 billion. Shareholders and foreign “tourists” will get nothing. The authorities will lean on state banks to keep lending developers enough to stay afloat."













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