China's Real Estate Bubble Finally Cracking?

[Spekulatius]

2 hours ago, hasilp89 said:

 
His thesis has all the ingredients for panic, fear and selling. Hard for me to understand how things actually play out with CCP though.

 

One side of me wants to believe that fundamental finance & economics play out (lots of leverage, fake demand, overcapacity, loss of confidence -> pain).

The other side wonders if the CCP is able to control it all because it controls everything - have listened to China bears for years - what is the hair that breaks the camels back - is there one?

 

either way worth understanding potential risks to the businesses i own.

That’s a strange account that came to my attention too. I am not sure what to make of this.

 

My sense is that the CCP will try a controlled burn, Evergrande equity holders  will be zeroed, some apartment holders will be left holding the bag, some bond holders will take losses etc. I think they like the idea to reduce rampant speculation and this gives them a cover to do so.

 

I think the CCP controls enough about the banks, economy etc to prevent systemic risk. Panics were very common before there were central banks. The CCP is almost omnipotent in China and has way more influence than the Fed and the government has in the US.

I think they can easily avoid systemic risk.

[Viking]

This is going to be really interesting to watch. It appears the CCP is taking the same approach with Evergrande as the US took with Lehman Brothers - let it fail. With hindsight i am not sure the US would have done the same thing given how the situation quickly spiralled out of control. 

- https://www.theguardian.com/world/2021/sep/17/chinas-lehman-brothers-moment-evergrande-crisis-rattles-economy

 

It appears we will soon be learning how the Chinese political system/economy will deal with its first big internal economic crisis - its made in China version of a real estate bubble. 
 

The US model was to let a large swath of their population lose everything. Brutal. Also effective (some would say). 
 

I highly doubt China’s solution will see Chinese citizens taking the biggest hit. My guess is the hit will primarily come from equity investors AND BOND HOLDERS. And i think what they do with bond holders will be one of the keys. Who will the CCP throw under the bus to manage through their property bubble? 

 

My guess is international investors (once again) are going to get taken to the cleaners (likely already happening). International investors are once again going to learn the hard way what ‘common prosperity’ means for the owners of capital. China’s is, after all, at its core still very much a communist country. It is like a wolf wrapped in sheep's clothing - a communist country pretending to be capitalist (to get investment and technology from abroad) until it no longer serves their needs (that common prosperity thingy again . Smart buggers. 
 

Property market meltdown. Education enterprises, gaming, gambling, tech meltdown. All at the same time? How does ‘common prosperity’ play out in a crisis?

 

Do we see international investment into China drop off a cliff?

 

We are also going to see how well the CCP can thread the needle and manage this developing crisis. 
 

Contagion is now at play. China is now a massive economy and what happens there matters to the rest of the world. Get your popcorn out.

————————-

Analysis: Investors brace for a great fall in China

- https://www.reuters.com/business/investors-brace-great-fall-china-2021-09-16/

Edited September 18, 2021 by Viking

[SharperDingaan]

18 hours ago, muscleman said:

 

That would only work if the husband's own salary is able to support the whole family, which is not realistic in most cases today when the property prices are sky high and a single earners salary is not able to support the mortgage.

Remember: The US houses are trading at 4-5x median annual household income and most households are single earners. The Chinese condos are trading at 20-25x median annual household income.

 

 While China both remains the 'workshop of the world' and continues with its build, there are jobs for young people. Going forward, most would expect both these to taper off, unemployment to rise, and young women to bear the brunt of the lay offs. However the unemployment rate will NOT rise - if those young women are permanently leaving the workforce to raise kids!    

 

The CPC could easily 'break wings' to make that happen. The resultant pent-up baby boom both supporting the domestic economy for a good 3-4 generations, and diminishing Chinas reliance on ongoing 'western' demand for Chinese goods. Make property in the ghost cities affordable, available, and move industry there - or be disappeared/nationalized with minimal compensation. You live in China, not the west.

 

Ultimately, it's just a different approach, measured by different metrics. 

 

SD

 

 

 

[John Hjorth]

Welcome to CoBF, WFF! [ : - ) ]

[John Hjorth]

Here is another tweet about Evergrande from a Twitter user called Ming Zhao. To me, it reads just ..."juicy".

[Viking]

36 minutes ago, John Hjorth said:

Here is another tweet about Evergrande from a Twitter user called Ming Zhao. To me, it reads just ..."juicy".

Thanks for posting the link. State gets paid. State dictates terms to company. No rule of law. No recourse. Just another beautiful day of investing in a communist country. Can’t wait to read how Blackrock etc put lipstick on this pig for its customers back home…
 

Ming Zhao

 

11/ What does the seniority waterfall look like? Who gets paid first? Who gets paid last? 1. the state (Evergrande's bank loans are state-owned assets & must be redeemed before all else) 2. suppliers (mostly in the form of commercial paper redemptions) 3. investors 4. employees

12/ So what can Evergrande do now? 1. Liquidate existing assets (i.e. land) for cash 2. Restructure contract terms to push out maturity 3. Debt to equity swaps 4. Sell more equity 5. Declare bankruptcy 6. Wait for bailout

13/ Who wins & who gets f*cked under each scenario? It's quite simple. The state always wins because it'll be first to get paid and will always be able to force management to make decisions at the expense of every other stakeholder group. Everyone else gets f*cked.

Edited September 18, 2021 by Viking

[John Hjorth]

Viking,

 

I recall back in April 2017, I attended the AGM of Vestas Wind Systems A/S i Aarhus, Denmark. At that AGM, the Lady of the House attended, too, and we met with @TBW. [He is just such an awesome guy in every aspect!] I recall Tim asked if I've ever looked at this Chineese behemoth of a RE developer, that was writing empty real estate up, up, up! Tim is a long/short guy. He was in self-occilation & mental overdrive. [ :- D] I had forgotten the name of the company, but now I think I remember it! Now I'm in urge to get in contact with Tim to hear if he ever found a way to short this darn thing! [ ; - D]

Edited September 18, 2021 by John Hjorth

[muscleman]

On 9/18/2021 at 1:40 PM, Viking said:

Thanks for posting the link. State gets paid. State dictates terms to company. No rule of law. No recourse. Just another beautiful day of investing in a communist country. Can’t wait to read how Blackrock etc put lipstick on this pig for its customers back home…
 

Ming Zhao

 

11/ What does the seniority waterfall look like? Who gets paid first? Who gets paid last? 1. the state (Evergrande's bank loans are state-owned assets & must be redeemed before all else) 2. suppliers (mostly in the form of commercial paper redemptions) 3. investors 4. employees

12/ So what can Evergrande do now? 1. Liquidate existing assets (i.e. land) for cash 2. Restructure contract terms to push out maturity 3. Debt to equity swaps 4. Sell more equity 5. Declare bankruptcy 6. Wait for bailout

13/ Who wins & who gets f*cked under each scenario? It's quite simple. The state always wins because it'll be first to get paid and will always be able to force management to make decisions at the expense of every other stakeholder group. Everyone else gets f*cked.

 

#2 is not an option anymore since last year. I think this whole Evergrande saga was engineered by the current administration because it published a "3 red line rule" last year, and under that rule, it ordered all banks to stop lending to Evergrande last year. Whenever a heavily indebted company suddenly is unable to rollover its debt, it will inevitably fail.

 

[Spekulatius]

The large HK real estate developers are getting slammed too by recent signaling from Xi apparently. The red chips CK asset and Sun Hung Kai are down ~10% today. The Chinese government is not afraid to break glass and let the investors walk over the shards. Xi is obviously not afraid about contagion in real estate, otherwise the newsflow would be less contentious. You kind of wonder which sector is next.

 

[SharperDingaan]

Most would expect the state to assume the entire housing inventory for the value of its loans, and let everything else crash. Thereafter the inventory is finished off, and the apartments rented out as social housing. 

 

Housing affordability is a global problem, and even Germany (Berlin) is actively thinking of nationalizing the housing stock.

https://www.theglobeandmail.com/business/article-berlins-bold-proposal-for-surging-rents-evict-the-landlords/

 

SD

[Spekulatius]

25 minutes ago, SharperDingaan said:

Most would expect the state to assume the entire housing inventory for the value of its loans, and let everything else crash. Thereafter the inventory is finished off, and the apartments rented out as social housing. 

 

Housing affordability is a global problem, and even Germany (Berlin) is actively thinking of nationalizing the housing stock.

https://www.theglobeandmail.com/business/article-berlins-bold-proposal-for-surging-rents-evict-the-landlords/

 

SD

LOL re Berlin. I dimly recall they did this before from 1948-1990. It didn't work out that well. The DDR & East Berlin actually had quite a substantial housing shortage and while the rents were cheap, you couldn't expect the toilets to work.

[Peregrine]

I find the responses of China taking a hard line wrt Evergrande to be pretty funny. To me, it's crazy how long they've let Evergrande hang around for so long. This company even tried to build an EV company.

[John Hjorth]

Here is a [not in any way by me confirmed] group chart of the company.

[adesigar]

From this article I believe

 

https://www.bloombergquint.com/gadfly/evergrande-and-its-mainland-property-unit-split-that-s-bad-news-for-investors

[Spekulatius]

So what else will crack when China's real estate boom cracks:

$CAT (same for Komatsu, Hitachi), Copper, Steel, Iron ore (already in process), crude (?) Aluminum etc.

Concrete demand will certainly  fall as well, but that is mostly produced local. I don't think much lumber is used directly in construction in China, but I know that China is a significant lumber importer.

[JRM]

Marked safe from the great correction on 9-20-2021; AMA.

[Spekulatius]

3 hours ago, JRM said:

Marked safe from the great correction on 9-20-2021; AMA.

We dodged a few bullets but there is also a Powell speaking at 2PM today.

[patience_and_focus]

 

In absence of other information, this could be interpreted in many ways (whether this is a bubble or not). But one thing is clear - if a family is middle class with close to median income (or even up to 3rd quartile) it is dangerous to buy with these kind of prices in China's top tier cities. Any reasonably prolonged price growth stagnation or reversal can lead to severe pain.

 

A more complete ranking  and other metrics (for fun). NYC and SF are not even in the top 200 for any metric! 

https://www.numbeo.com/property-investment/rankings_current.jsp

 

P.S: Some data is certainly noisy but at a high level a good snapshot (data from big countries / cities is probably more reliable)

https://en.wikipedia.org/wiki/Numbeo

https://raywoodcockslatest.wordpress.com/2017/06/06/123-low-cost-cities/

 

 

 

Edited September 22, 2021 by patience_and_focus

[Gregmal]

Meanwhile theres folks going on and on about a US housing bubble LOL

[UK]

https://www.wsj.com/articles/evergrande-is-chinas-economy-in-a-nutshell-11632233862

 

"The long-term impact could be even more disruptive. China has tried repeatedly to rebalance its economy away from debt-driven construction toward consumption and service industries. It has had some success, but every time there is a slowdown, it returns to the tried-and-tested model of jacking up debt and investment to boost growth. This time might be different, as President Xi Jinping has secured all the levers of state power; perhaps he is ready to accept slower economic growth as the price of it being more sustainable. Capital flight is hard too, after a clampdown on routes previously used to get money out of the country, and with Covid-19 restricting travel.

 

If China really is pushing back against unsustainable debt-driven growth, it faces a series of tricky problems as it remakes its economy. It will have to wean the population off the idea that empty apartments are a good vehicle to save money, without destroying everyone’s savings. It will have to persuade people that they should save less and spend more. It will have to reallocate vast numbers of workers and capital from real estate and the broader construction industry, which together make up about one-eighth of the economy, and together with suppliers probably account for more than a quarter of gross domestic product. And it will have to raise taxes to substitute for land sales as a source of finance. Worse, it will have to do all this while adding less debt and accepting a lower growth rate. The model needs rebalancing, because it is unsustainable. China adopted the same if-you-build-it-they-will-come mantra as Kevin Costner in “Field of Dreams,” but aging demographics and slowing urbanization mean “they” no longer come in such numbers. Debt absolutely can’t keep rising at the rate of the past decade, either. China is one of only three countries to add nonfinancial debt amounting to more than 100% of GDP since 2011, according to the Bank for International Settlements (alongside Greece and Singapore, while Chinese territory Hong Kong has, too). It now has about the same level of debt-to-GDP as the U.S., despite a significantly less well developed financial system.

 

If China succeeds, it will mean less demand for the raw materials it has been importing, more demand for consumer goods, and, probably, a better balance of trade. For the rest of the world, that means lower prices for steel, copper and the energy that was going into cement, and less need for China to recycle dollars into Treasurys and other overseas holdings. But if China succeeds it also means less cheap Chinese labor and more Chinese consumption pushing up global demand, both of which are broadly inflationary. History suggests it is exceptionally hard to navigate such shifts without mistakes, and China is so big that the shifts will need to be global, not merely domestic. It could be a bumpy few years. China’s stop-start rebalancing hasn’t made much progress in the past few years, but it seems to me that Mr. Xi is more and more serious about it, quite apart from wanting to reassert control over the private sector. As that rebalancing filters out into the rest of the world it will matter to all of us. Evergrande is a wake-up call."

[WFF]

On 9/19/2021 at 2:17 AM, John Hjorth said:

Welcome to CoBF, WFF! [ : - ) ]

Just saw this.  Thanks John!

 

 

[ANP301191]

45 minutes ago, UK said:

https://www.wsj.com/articles/evergrande-is-chinas-economy-in-a-nutshell-11632233862

 

If China succeeds, it will mean less demand for the raw materials it has been importing, more demand for consumer goods, and, probably, a better balance of trade. For the rest of the world, that means lower prices for steel, copper and the energy that was going into cement, and less need for China to recycle dollars into Treasurys and other overseas holdings. But if China succeeds it also means less cheap Chinese labor and more Chinese consumption pushing up global demand, both of which are broadly inflationary. History suggests it is exceptionally hard to navigate such shifts without mistakes, and China is so big that the shifts will need to be global, not merely domestic. It could be a bumpy few years. China’s stop-start rebalancing hasn’t made much progress in the past few years, but it seems to me that Mr. Xi is more and more serious about it, quite apart from wanting to reassert control over the private sector. As that rebalancing filters out into the rest of the world it will matter to all of us. Evergrande is a wake-up call."

While I agree with all the comments made in this article - thanks @UK for bringing to the top of my reading list - I think where the author makes a mistake is thinking China is a "western" or "democratic" country. The Chinese state has levers of power that no government in the West could/would dream of. In terms of reducing demand for property, it could be done by dictat - perhaps a "one house per person" rule or something of the same. Additionally, there is no large corporation in China that isnt swayed significantly by the state, whether that is the local government or central government. While the internal tensions between states and the center will be interesting, the local governments requiring land sales to meet their budgetary needs, I doubt very much that Mr. Xi doesnt come out on top. The examples of the tutoring business, the various tech businesses, the gaming businesses come to mind. If the Central government thinks that some activity is a net negative to the population or the Party, they will bring down enormous power and enforce large corrective actions. I think we are seeing a part of that today with Evergrande and I doubt that it will be a unique scenario in the near future.

 

What will be really interesting is how the supply economies to China do in the scenario where China slows down. Australia may have a robust economy, but it is heavily dependent on mining and materials. Chile exports to China account for something like 32% of its GDP. South Africa is north of 10% of its GDP, and these are just countries that I follow due to having large exposure (as a % of my portfolio). I am sure you could rattle off a list of Central Asian and African countries who will be heavily dependent on Chinese manufacturing and construction growth, what happens when China is no longer the worlds factory and is no longer building thousands of homes for fun. Raw materials required for manufacturing will still get sold but at what price? And the inflation caused by rising wages in China probably will be acerbated by the lack of efficiencies in production elsewhere. At some point, the Chinese consumer will demand more and more goods as well, what happens when that additional demand gets added into an already changing supply pipeline.

 

Its going to be a very interesting few years!  

[TBW]

On 9/18/2021 at 5:10 PM, John Hjorth said:

Viking,

 

I recall back in April 2017, I attended the AGM of Vestas Wind Systems A/S i Aarhus, Denmark. At that AGM, the Lady of the House attended, too, and we met with @TBW. [He is just such an awesome guy in every aspect!] I recall Tim asked if I've ever looked at this Chineese behemoth of a RE developer, that was writing empty real estate up, up, up! Tim is a long/short guy. He was in self-occilation & mental overdrive. [ :- D] I had forgotten the name of the company, but now I think I remember it! Now I'm in urge to get in contact with Tim to hear if he ever found a way to short this darn thing! [ ; - D]

Thanks for the kind words John!

 

I never did short Evergrande, though they were obviously insolvent back when we discussed the name. So hard with shorts, you often need an adult to enforce the rules, or shorts don't work. Somewhat ironic that China actually did something about Evergrande, and in North America that adult has very rarely stepped in...