Topic: Chinese construction Mega-Bankruptcy. Evergrande about to crash for 355B (Read 611 times)

Yeah, Evergrande has an interesting story, luckily, the company managed to avoid bankruptcy, and as far as I know, it still exists. Talking about construction, I decided to rebuild my house not so long ago. I made everything by myself, and to my surprise, the hardest part was finding tools and construction materials I could use to rebuild my house.

Their last condition, the Chinese government took their assets to keep their project running.  Because if the project stalls, the impact will be much bigger and there will even be no more trust from consumers in their country.  The government also before this case came out had issued 3 red lines indicating the bad finances of the company, so it is natural for the government to take over easily for the sake of economic stability.

I am not certain how and who profits from the scam, however, we can assume that there is always someone who makes money in the scam. Also, this is very much similar to much of the projects in the cryptospace. Project owners will keep continuing the scam until unprofitable or caught by regulators.

And I think the point is different!
1. Corruption. All these constructions were financed from the provincial budgets, under the auspices of the state program. As we know, corruption in the regions is simply flourishing. Now imagine a "pie" of hundreds of millions of dollars, from which you can tear off a significant portion. They write that the houses in these cities are ghosts, of very low quality, and it is impossible to live in them. Those. the construction was carried out according to the budget of high-quality housing, but in fact "sand cities" were built.
2. The fact that people were given jobs is good, but it is a by-product of corruption.
3. The investment attractiveness of housing, especially when the bubble is inflating, is always very high! People do not care what is actually being built there, the main thing is that the price is growing, which means that 1 yuan today will become 10 yuan in 1 year. Who would refuse such an investment?
4. Well, now there is such a situation - huge debts, a huge amount of illiquid housing, the shutdown of system enterprises and entire sectors of the economy ...

Building buildings that remain unoccupied give jobs to the workers who are constructing the buildings. It gives profits to the various suppliers of the builder and employment to the suppliers' workers.

I might compare the Chinese building ghost cities as public works projects in the US in the 20th century. Although, unlike the US public works projects, it is unlikely that any Chinese citizen will ultimately use/occupy the ghost cities.

Also, unlike the US public works projects, private citizens own the end work products of these ghost cities, meaning there is the potential that real estate prices will collapse.

That's what I am trying to understand. If nobody is buying it, and it is artificially increasing the GDP, that still doesn't help the people, that still doesn't help the ones that built it, that just increases GDP for a while in a fake manner, but the reality will be open eventually, which we are seeing right now. I mean did they really assumed they would avoid the consequences of their actions? That literally never happened in history of humanity before, would it suddenly start happening now?

Every bad move has a bad consequence and that is what we are seeing, it was obvious from the start. Even if people managed to buy a few, how many could have they bought? It was obvious that it was a failed move, and the result is exactly what is suppose to be.

@doomloop. Those properties in the ghost cities were not built because the people could buy them. Much of those construction projects in China were built because it helped increase the country’s GDP artificially. What we are presently witnessing is the cost of this unmaintainable scam.

I guess how many people could actually buy a house? Realistically? It was obvious that nobody would be able to keep on buying house after house after house, so they would get one and that would be enough and the people who couldn't wouldn't and that would be the end of it.

If you keep on building houses after houses constantly, there will be a situation where you do not have any people that would be able to get that excess amount of houses you have. The idea to cool it down was good, but spreading would have been even better. China really just wanted to "look" good, and they are not, so while trying to look good they basically managed to show the world that their people can't even afford a house, that tells you how bad the situation there is.

I think the goal of building up all those "ghost cities" in China was to ghoose their economic growth, to keep people employed, and to increase wealth of Chinese citizens (to keep them happy).

Ultimately, Chinese real estate prices became too hot, to the extent that the CCP was afraid households would become overburdened with debt when trying to buy real estate, so they tried to cool the market. It appears they have gone too far, as sales have been down by double digits YoY for two months in a row.

According to this article, it appears that Beijing might not bail out China Evergrande Group and other Chinese property developers. I reckon this is good. This is how real capitalism is supposed to be. I shake my head when people say they support capitalism, however, when everything begins to dump they expect a government bail out.



With Chinese high-yield issues experiencing their worst selloff in a decade, murmurs are growing that China is poised to blink and relent on its property tightening measures. That hope was shattered on Friday. At a news briefing, the People’s Bank of China broke its silence on China Evergrande Group and said financial risks posed by distressed property developer, which is on the brink of a $300 billion debt restructuring, is “controllable.” That is a code word for “no bailouts.” The central bank tossed the blame to Evergrande. “In recent years, the company failed to manage its business well and to operate prudently amid changing market conditions,” an official said. “Instead it blindly expanded and diversified.”

Source https://www.bloombergquint.com/gadfly/china-won-t-save-evergrande-to-prove-who-s-boss-to-its-reckless-developers

While everyone was talking about the bankruptcy of construction companies in China, another event took place in China, which suggests that the country is waiting for changes, and apparently not for the better. So: just recently, China celebrated the 100th anniversary of the Chinese Communist Party. In honor of this, an approved list of .... "great spirits of the spiritual lineage of the Chinese communists" was released. No, you heard right! Exactly. Here is the link to the website of the Chinese Communist Party, check out http://cpc.people.com.cn/n1/2021/0929/c64387-32242664.html
Why do I consider this event "important" enough and that it will affect China, and most likely negatively. Let me explain - in all totalitarian regimes, with the deterioration of the situation inside the country, the only way to restrain the population from rebellion is a sharp increase in patriotic movements, ideology, etc. Read what "spirits" will now be at the head of the Chinese ideologues! the spirit of party building, the spirit of Soviet territories (!!!), the spirit of the anti-Japanese war, and others, no less patriotic. So very soon we will see the "whipping up of patriotism" in China, with all the consequences of totalitarian regimes

Exactly, I just wrote something similar in the other Evergrande thread.  Coincidentally, also in response to you.  The totalitarianism is exactly why the party can't tolerate a free Hong Kong or an independent Taiwan.  Having free societies of ethnically chinese inhabitants could inspire people to question the party's rule over mainland china, so it is imperative from the party's point of view to bring both Hong Kong and Taiwan to heel, and sooner rather than later.

I would say that construction in China is "a process for the sake of a process", but not for the sake of goals. It goes without saying that at some stage there were both investors and buyers. But actions must be judged by results. What's the bottom line in China? Millions of meters of ghostly real estate. Millions of meters of empty cities. Billions of debts from regional authorities. In the near future, there will be a massive bankruptcy of related industries and entire sectors of the economy, and the state does not want to help this or flood this crisis with money.

Alot of the problem with Lehman was it got stuck with debt it had intended to trade.   They traded on leverage and when the music stopped, they got stuck holding onto what could easily be bad debts and nobody would touch them.   Hence bankruptcy protection and effectively the end of their live trading establishment, they became an empty husk drifting waiting to settle a book.   We all know mortgage debt is not to be played with as its easily 25 year term and worst case you might have to hold it that long, that is why I think they still there handing money from their assets and revenue onto their debtors and agreed payment programs.   Obviously their breached agreements but its considered far better then a total collapse.
   You can also consider Barclays the successor to Lehmans if you like, they picked up the majority of their operations as a whole as some of it was good after all.

China doesnt really operate open market discovery on bad debts I doubt, its probably all about the party line what deal happens.   I saw they were pulling down some long empty buildings as part of debt clearance, I guess the land can be reused.

Completely agree with the commentary regarding "too big to fail".

I think that this sort of self delusion is actually permeating throughout the cryptospace as well, especially NFTs.

But yeah, the Evergrande situation is definitely not as significant as Lehman given that a) it's not as big and b) it's nowhere near as interconnected and complex as Lehman was (and most of the victims are retail investors more than other institutions).

There are a lot of people in China who "invest" in housing, even if they don't live in the house/apartment (nor have renters). There are also many ghost cities in China that are nearly entirely vacant, even though they have been fully built. I suspect building these vacant cities is at least part of how China has seen its economy grow so much in recent decades.

If confidence in real estate in China is sufficiently eroded, housing prices will fall, by a lot. In 2018, it was estimated that approximately a quarter of urban housing in China was unoccupied.

Everything is well and almost fully described, thanks! But there is another nuance. Deep penetration into the economics of the construction business and related! I, being in China, about 10 years ago, was surprised how much they build. This was explained to me by some kind of "agreement" or an internal project, when the state creates comfortable conditions for such a business, banks lend almost without restrictions, all this gave a strong impetus to the development and growth of related businesses - the production of building materials (concrete, brick, fittings, cable products , building mixtures and cement, etc.), and these are thousands of enterprises, millions of jobs, market development ...
They also said, but I cannot confirm that it is true that residential construction in China on such comfortable conditions was "allowed" if more than 95% of Chinese resources are used during the construction of the facility.
As a result, housing construction has become a mega-profitable and large-scale project in China. Now imagine what will happen if this one of the "prime movers of the economy" stops? Thousands of enterprises, due to lack of demand, and then financing from banks, will stop their production. Together with them - construction artels, where builders, plasterers, loaders, electricians, crane operators, ... The next link - tens of millions of unemployed. The next link is an increase in the load on local budgets for the maintenance of these tens of millions (and maybe much more), unemployed. Non-repayable loans, a drop in quotations ... Therefore, it is too early to talk about the consequences, not all processes have appeared yet ...

When Leghan failed, it held many assets that were traded on various exchanges. There were fears that Lehan would try to sell these assets at fire-sale prices in order to prevent bankruptcy, and these fears caused these asset prices to decline by a decent amount compared to what is normal for those types of assets. This meant that other banks that had no direct relationship nor exposure to Lehan was taking losses because they were holding similar assets (that had no realistic increased chance of defaulting). This had a cascading effect of banks being unwilling to lend to each other, or to anyone else.

Evergrande on the other hand holds assets that are not routinely traded on exchanges -- its assets are primarily made up of housing projects they are working on building, and shares in various business ventures. The companies that Evergrande holds equity stakes in will likely see depressed stock prices in the near term, however, this is not a huge deal for those companies because most companies do not rely on equity financing for day-to-day operations.

The damage that Evergrande can do to the Chinese economy is through the money it owes to its suppliers. Evergrande is a major customer of, and creditor to each of its suppliers, and Evergrande's ability to quickly pay its suppliers will affect its suppliers' ability to provide services to other companies that are building housing in China. This may lead to other builders incurring cost overruns and delays in completing their various projects.

Lehan was interconnected to the economies of the US and most European economies. Evergrande is really only connected to the Chinese economy (even though it does owe money to overseas creditors). I would say that Lehman's $600 bn in debt is about the same percentage of the economies it was connected to in 2007/8 as to the $300 bn in debt Evergrande has compared to the size of the Chinese economy.

The CCP maintains tight control over information throughout China. If you look at why the markets crashed in March 2020, you would see this was largely caused by the panic caused by left-wing MSM (there is even a similar, although less strong argument regarding why the housing bubble popped in 2007/8). The CCP will not allow this kind of media-induced panic and will instruct banks that are effectively run by the state to continue lending to companies that probably should not be lent to by objective underwriting standards. This undeserved credit allows companies to avoid failure and to eventually be absorbed by other state-run businesses.

The above has resulted in the absence of bust periods but also means that many business failures are not widely known, and business leaders who took actions that would have lead to failures in the West have been allowed to remain in leadership positions in China. The situation with Evergrande is too big for the CCP to cover up as they have with other business failures. The CCP has made it clear that western creditors will be the first to see losses, although I believe that Chinese investors will see massive losses, which will lead to a major contradiction in the Chinese economy, hopefully enough for the CCP to lose legitimacy and/or power.

Nearly every major company in the world issues commercial paper. Evergrande's failure is not going to affect every company in China, and will not affect the majority of companies in Asia outside of China. It will probably not affect more than a handful of companies outside of Asia.

There has been speculation that tether holds commercial paper in Chinese companies. There was an article that went into great detail about many things about tether that was published ~a week ago, that briefly mentioned that tether holds commercial paper in Chinese companies. No details were provided.

If Evergrande does fail, and the market believes that Tether has serious exposure (regardless of the truth to this), I would expect the price of bitcoin to initially spike as people sell tethers for bitcoin, but will over the medium term decline as people try to redeem tethers in mass. This topic alone is probably deserving of its own thread.

Other real estate Chinese operators are defaulting on a daily Basis.
Evergande is of course the bigger of them all, but surely not the only one:




Brace yourself, more are coming.

A few decades back, China was under the iron curtain and the citizens were unware of the liberties being enjoyed by those in democratic nations. But along with economic prosperity, the communications with other countries also increased and as a result at least a section of the population started rebelling against the regime. Perhaps the events in Hong Kong (supported by the West) was the turning point. The regime realized that if they don't nip the rebellion in the bud, then it will end up in their own destruction.