> Bondholders of $19.2 billion in Evergrande dollar notes face deep haircuts as the company overhauls its mammoth balance sheet without a government bailout -- a process that promises to be long, contentious and potentially risky for Asia’s largest economy.
It might seem odd that a Chinese company would have taken out dollar loans, but the practice is common around the world. One reason is that the borrower can get lower interest rates because they assume the exchange rate risk themselves. If that bet goes sour, though, the borrower faces higher costs to service the debt.
Of course the thing about dollar bonds is that even if the national government were to intervene, those dollars can't be printed by Beijing.
The only way to service a dollar debt is to raise dollars. One path to doing that is to sell dollar-denominated assets. US Stocks and bonds in other words. So the pressures in China can spill over into the US economy through forced asset sales of dollar-denominated assets.
This is another angle to the contagion idea. Organizations around the world have taken big short position on the US dollar. As those loans come due, dollar assets are sold. Which drives the dollar higher. Which makes the dollar loans even more unsustainable. And so on.
It has been called the global dollar short squeeze:
And if you're really adventurous, there's something called the "dollar milkshake theory" which predicts the uncontrollable rise of the dollar as (maybe counterintuitively) a wrecking ball for the world economy:
19.2 billion is not that much money in the global banking system. There is no reason why bondholders should be guaranteed a return. Bankruptcy is an option.
The broader risk is an unwinding of Chinese holdings by foreign entities who suddenly realize that the Chinese government will have them foot the bill for bets gone bad, or simply bets that the Chinese government doesn't like. China has capital controls to manage these outflows.
Which all leads to the scenario where foreign investors in China's economy are probably going to get taken for a ride at some point. Arguably some companies like ARM are already in this situation but it's in everyone's interest to pretend they are not.
Yeah, I thought the same thing in 2008, then the haunting words "too big to fail" were used by both Obama and McCain, so it didn't care who won the presidential election, the banksters would still get a bail out. Fast forward to today, and it still doesn't matter whether a Dem or Rep sits in the oval office, the banksters will always have safety net.
It's worth considering the relative sizes tho: the Chines government alone holds 11 trillion dollars in treasury bonds[0], the total US debt is about 28T.
Evergrande's USD-denominated debt is 20 billion, even if they wanted to cash it all out rather than just refinance it I doubt it would be such a huge wave.
Panicing investors fleeing to the USD safe haven seems more likely to cause trouble.
> One path to doing that is to sell dollar-denominated assets. US Stocks and bonds in other words.
A big part of the world economy is literally or effectively dollar-denominated, so a sale of dollar-denominated assets does not imply a sale of US stocks and bonds. You can sell just about anything for dollars.
> The only way to service a dollar debt is to raise dollars. One path to doing that is to sell dollar-denominated assets. US Stocks and bonds in other words. So the pressures in China can spill over into the US economy through forced asset sales of dollar-denominated assets.
During height of the 2008 financial crisis the Federal Resevere opened an currency swap facility with the Swiss National Bank and the ECB ultimately capped at $620 billion, with the express purpose of allowing the other central banks to bail out banks domiciled in their jurisdictions.
So with the cooperation of the Fed, it is possible for them to print dollars.
There's zero chance this sort of emergency currency swap would happen with China though. Politically it would be the kiss of death to anyone involved and financially the Fed isn't going to pile up a bunch of largely useless yuan.
Worth noting that this "dollar short squeeze" is the exact opposite of the most common conspiracy theory about the dollar: that the Fed is printing them like its going out of style (through quantitative easing and whatnot) and destroying their value.
"Worth noting that this "dollar short squeeze" is the exact opposite of the most common conspiracy theory about the dollar:"
No, it's not an "exact opposite". If one accepts the premise that players in the economy do not always yell out all their motivations and fears on the most public channels they can find, which when examined directly seems obvious but people seem to forget about it a few seconds later and resume acting as if the news is in fact full of everyone's private motivations and fears, then one can easily harmonize these two theories into one by wondering if the reason the Fed is printing money like crazy is that they fear horrifying deflation brought on by a dollar squeeze, so they're trying to get ahead of it. Certainly once it starts happening it's too late to react.
It's not my personal first guess as to the Fed's primary motivation, but neither is it an idea too crazy to take seriously, and I could easily accept it as a secondary motivation.
Anyone thinking that dollars are going to go up in value is seriously loony. Dollars only go down in value. We keep printing more of them. At the same time, we aren't printing as much land and productive assets to keep pace...
The entire US economy has become dependent upon asset prices going up. The easiest way to achieve that is to make dollars go down. Conveniently, there is a branch of the government (The Fed) - who answers to no one - and who has the power to print dollars.
Sure, some American companies actually do things. But a startling amount of wealth in this country is tied up in R/E and derivatives. If dollars go up and asset prices go down - this explodes spectacularly.
The Fed chairmen are all relatively wealthy. IIRC, Ben Bernanke was - by far - the poorest Chairmen ever. At the time he was elected, he had a net worth of $2.5M - inflation adjusted would be >$5M.
That's still similar to the type of wealth you read about in Jane Austen books...
How can one participate in making profits during a "dollar short squeeze"?
GME was easy. Hold the stock, sell it to the shorts. How do you do that with US dollars?
Secondly, as crazy as this sounds, would it be one reason for the Fed to preemptively drive inflation? (I suppose a low constant multiple in devaluation wouldn't blunt a short squeeze peak entirely, but might make it less sharp?)
>How can one participate in making profits during a "dollar short squeeze"?
If you believe OP, borrow as much foreign currency as you can and exchange it for USD. Back in 2007-2008, many Canadians emptied out their savings to buy USD at incredibly favorable exchange rates. Within a year or two they made over 30% as the CAD fell and the USD recovered.
This is true, but I don't know to what extent Chinese businesses can purchase USD assets? My assumption is it's probably harder (you need Chinese government permission) to do so? Certainly chinese retail investors can't do it at the moment.
Goldman Sachs also estimated that Evergrande had about $300B of debt-to-equity that will be due in less than two years or so. Given the current market condition, I really don't see how Evergrande can ever recover.
I suspect and hope many of these borrowers issuing dollar-denominated debt are also entering into foreign exchange futures contracts. The reason they'd want to expose themselves to US dollar FX risk and then hedge that risk is to make their debt appeal to a wider range of international buyers.
This post shouldn't be construed as financial advice in any form.
The world economy is in trouble, the US has leadership issues and China has declining growth.
Inflation will soon strip away any gains in growth.
Hold onto your seat.
Yes, except this type of event is massively DEflationary.
Creation of more debt is creation of more money, increasing supply, and is inflationary.
Conversely, destruction of debt destroys money, and is deflationary, in this case, deflationary to the dollar.
Also, selling of dollar-denominated assets also decreases the dollar-value of those assets and so increases the value of the dollar.
But it is inflationary for the Chinese currency.
This is why with the Fed's QE programs since the 2008 crash everyon ehas been yelling "Inflation!!" for over a decade, yet there was none-negative until this year, and even that is arguably transient. So much money was destroyed in that crisis that they have been ever since then trying to fill in the (deflationary) hole.
To the extent that that debt is denominated in dollars and is about to be destroyed, it will be dollar-deflationary, not inflationary.
So I lived in a SE Asian country and saw this first hand.
There is no equity market (that you can trust), bonds pay nothing so property is what you invest in (or you just sit on cash that is rapidly losing value during to inflation). Ownership is recognized even by corrupt bureaucrats and courts. Ownership papers are next to sacred documents. And no property tax so zero holding costs. The perfect investment.
No legally defined ownership? No problem! The developer is working on it. They just need $30,000 USD down to secure a plot. Ownership papers will follow.
So you pile your savings into real estate. You dump every single dollar you have into speculative real estate developments.. A single family home 10 km from a major city costs more than it does in California (~$1.5M USD) and local median wages are 1/10th that of the US. You can visit developments that are nothing more than 100 homes that are concrete shells with rusting window frames. Maybe 1% occupied.
But don’t get me wrong, some developments fill up super quick. But some just die.
Want to rent a place? Fuck you. Owners aren’t banking on rent, so pay them $3k per month. It’s all about appreciation. They would be happy to leave it empty. Less hassle that way.
This is misleading and not very useful. Property and incomes are very local, so looking at the data at a country level doesn't tell you much. For example, in the US there is a massive variance in the ratio between different cities [1] and between cities and rural areas. Your China example is a great one for where the data especially falls apart - China has a very large rural, poor population while the large cities have grown significantly more affluent with prices and salaries to match.
To match the growth expansion of prices? Absolutely not.
An apartment not even within main cities or rather 2nd or 3rd tier cities will still cost 300-500k USD, is made of questionable design and safety, isn't much more than a concrete box, and you don't even full own the land but rent it from the builders who actually purchased the right from the CCP for 70 years.
> China has a very large rural, poor population while the large cities have grown significantly more affluent with prices and salaries to match.
What you've said is true, but that doesn't mean the problem in big Chinese city is anywhere easier - the housing price is beyond afforable even for the affluent salaries. In my experience, large cities in China are more like Hong Kong where people have to work over 50 years to afford a house rather than 27 years.
I live in Beijing, and the rent I pay is around $1100 per month, but the valuation of the house is conveniently around $1.1m - it's 1k months or 83 years. As a senior software engineer, I earn a pretty decent income but it would still cost me to work several decades to buy that.
As another example for your reference, a colleague of mine - he saved money for quite some years by renting basement and spend nothing other than necessities, bought an 60m² old khrushchyovka (that old poor commie block the western world always laughing at) for around $1m. His story is very typical in China: even though he is that hardworking, he didn't afford it on it's own, but also plus his wife and 4 of their in-laws (it's so common that in China we call it "drain 6 pockets").
I've heard many Chinese tell me that property is a good speculative investment because China is increasingly urbanizing, meaning those farmers move to the city have to live somewhere. But how can a poor farmer pay for that $1 million apartment the speculators are hoping to sell to them? It doesn't make sense.
I still don't think that one bedroom apartment in Beijing is worth $1 million, even considering what Beijinger's make. And you can rent that same 1 million dollar apartment for just 8000 kuai (~1200$) a month also. Look at the price-to-rent ratios. China is definitely in a huge property bubble, possibly the biggest in history, by any measure.
This is a very simplistic view. I live in Austria. Believe me - houses are built very differently here. There are strict and severe regulations, governing the safety of the building, low energy consumption. Therefore houses are expensive. But they are built to last for generations. And I am not talking about the requirement of building a sturdier structure because of more cold weather conditions.
This is in stark contrast to the private houses I know of the US which may be even hauled from A to B and in my perception are more of cardboard-quality.
I've designed a residential house form the ground up in the US. The current building codes in the US are very strict and high quality. Especially around energy consumption. There are blower door tests to makes sure the house is air-tight. The insulation requirements make it so the furnace rarely comes on even on the coldest days.
I like how you say this like it's undoubtedly a good thing.
In Japan, old houses are rightfully considered depreciated as things like "severe regulations" and "low energy consumption" change over time as technology improves. Having a house built in the 1700s sure isn't going to be easy to solarize or insulate. So paying for 300+ years of that upfront seems pretty dumb.
In Austria, are there severe regulations on the safety of building and energy consumption of cars? I take it that it's very common to see 60, 70, 80 year old cars on the road there and they're not just disposable cardboard quality things, right?
It's a cultural thing. In Austria, people build multi-generational houses because it's expected that your kids and grandkids will live in the same house. In fact, Austria only has one city with two million residents - the rest live in mostly tiny towns where everyone knows everyone (and if you're a newbie, that's not a good thing). Anyone who opens up a business, names it after their family. In other words, where you come from is important, and ideally you come from a family that's been in this town forever. So, in a world where your heritage is a disproportionately big part of your standing in the society, geographic mobility is not a universally good thing.
I am sure there are parts of the Midwest that work the same way, but that's by and large not how the majority of the US works. Your heritage is refreshingly irrelevant, and therefore you can move freely from one place to another. Most people realize that big cities offer better career opportunities, and also that big cities suck for retirement. So you essentially see the following migration pattern:
1. [some place where you were born]
2. [your college town]
3. [career-related move to a bigger city]
(this part can repeat itself many times)
4. [retirement somewhere warm and/or affordable]
So if you're going to move somewhere in the range of 5+ times, why would you invest in a multi-generational home?
Finally, as an aside, interesting to note the correlation between the geographic and economic mobility: the American Dream may or may not be alive anymore, but I've seen so many kids from my college come from nothing and make a fortune (and shockingly, kids from good families end up as failures, mostly due to some sort of conflict with their family). I think the society in the US has accepted that there's a lot of uncertainty when it comes to predicting a kid's future.
That stuff simply doesn't happen in Austria on that scale - if you're poor, you'll stay poor, and vice versa. So a good family name leads to a good standing in the society, and the loop repeats itself (this is where your residence can also serve as a signal for your wealth to reinforce that loop). Why risk leaving all that and moving to a new city where you'd be starting from scratch?
Talking from a Swiss perspective here: What usually happens here is that facades are protected to "maintain the look" of a certain neighborhood. But everything inside the exterior walls is ripped out and completely rebuilt from scratch every 50 years or so. I think European cities are just denser than North American ones and the resulting buildings more expensive per square meter.
This seems to have started a fight; in both countries the price of the house is probably going to be a small part of the cost in major cities. Certainly construction costs have not doubled at the same rate as house prices.
The UK perspective on old vs. new: newer houses tend to be tiny and feel less comfy even if built to stricter standards. Old houses come with more problems. In Edinburgh "New" Town (late 1700s), it's common to see cabling being run up the outside for things like broadband, because the building is of stone and there's no other sensible way to do it. Retrofitting all the old housing stock is going to be difficult-to-impossible.
Don't forget planning regulations. Gutting a building and effectively building a new one inside incurs far less paperwork (and possible objections!) than demolishing it and building a new one. The UK loves declaring anything and everything to be historic.
Moving houses from A to B? Are you talking about manufactured homes? Outside of those, which do not represent the average American home, I've never heard of a house being moved except in very unique, very costly circumstances.
Do you actually believe that most of the people in the US live in mobile homes?
My house was built in 1916 and will easily last another 100+ years. Almost all the houses in my neighborhood were built around the same time and are still standing in good condition. Yes it's a wood house and yes wood houses can last a long time.
North American houses have environmental forces constantly try to destroy them that are stronger than those in Central Europe. In the north, we get frosts down to -35 degrees Celsius, that can freeze ground about 1.5m deep in extreme cases. In the south, they get humidity and termites.
That being said, what's important about a house is the foundation and the roof. The foundation of mine is as good as any in Europe. The roof, well, asphalt shingles on top of 5/8" plywood on top of roof trusses. Ho hum. But such a roof and attic can be properly maintained, which means keeping it vented even when there are 3 feet of snow on the roof - the modern pagoda style vents go a long way to solving that problem - to avoid ice dam issues, and of course replacing the shingles every 20-30 years.
It is possible to get European style masonry roofs here. Perhaps such a roof over a properly insulated and vented (i.e. cold!) attic would work here. I see them here and there but don't know anyone personally who has one.
I have encountered the occasional North American house owned by traditional Europeans. And they looked just as nice and impeccably maintained as any in Europe. And while maintained this well, will last for centuries. Unmaintained, they certainly deteriorate more quickly.
Those homes that can be hauled from A to B in the US are not the only type of home available, they are just the cheapest option to get a home. They are called (if the speaker is kind) "mobile homes", or (if the speaker is derogatory) "trailers", leading to the insult "trailer trash" for the people living there. People living in these mobile homes are typically poor, and the low cost of these homes is all they can afford.[&]
Moving up a step is American style 2"x4" framed houses. These are typically built on a concrete foundation, but the structure is formed by inexpensive lumber. This system was designed to go up fast and cheaply, substituting more cheap lumber rather than any sophisticated carpentry [$]. This cheapness offers a home to more people, at the expense of craftsmanship and (probably) longevity. The cheap construction allows people to build enormous homes if they have the means, displaying wealth through sheer size rather than higher quality construction (the resulting homes are mockingly called a "McMansion", a joke pointing out that a big McDonalds hamburger is still... McDonalds quality. A blog making fun of these McMansions can be found here: https://mcmansionhell.com/
However, if you don't want a cheaply constructed home, you don't have to have one! You can find a builder that will build a home to your specifications. This will of course be more expensive, as you aren't tying into the continent sized supply chain for the cheaper construction, but if you prefer quality work, you can certainly make that tradeoff.[-]
In any event, it is usually the land under the home that truly appreciates, not the structure itself. This dynamic broadens the wealth divide between mobile home owners and owners of the second and third type of house. Mobile homes are often placed in "trailer parks", where the owner of the home rents a space to park their trailer, meaning they don't participate in any land value appreciation (and in fact will see their rent go up if the land appreciates).
Still, the focus on cost, and the several levels of price-point allow more people to be housed. The fundamental question is "is it better for a person to have a low quality house, or no house at all?" It seems that Austria has chosen the second, while the US chooses the first.
[&] When I loaded this page searching Montana (a remote, low population, low income state), I see some listings between $20-30 thousand USD. This is incredibly inexpensive, and affordable by basically anyone with a job in the US. https://www.zillow.com/mt/mobile/?searchQueryState=%7B%22pag...
Imagine not living long enough to ever afford a house.
You can't by a tear down in Toronto, Vancouver, Montreal, etc for under a million. Houses rise in value at a rate of about $$1500-2000 a week (for years) while wages have been stagnant for decades. You could have bought a house for 450k-500k in 2005 and sold today for 2 million. I've seen condos that were 175k in 2006 sell for 850k today. You can't even buy a shack out side the city for less than 500k and most are going for over a million or two.
Average price of a house in Toronto will be over 4-5 million in the next decade while the average wage will still be 45-65k.
You can absolutely buy a teardown in Montreal for under a million. You can actually buy a really nice house in a decent neighbourhood for under a million.
Ghana prices are completely bonkers. You have to work 100+ years to own property. Despite a expected life span of ~62 years and a population density somewhere in the middle grounds.
I can only guess that it probably has something to do with low incomes of a lot of citizens and foreign investors buying land/property. It could also be something akin to very low average income for rural residents mixed with a relatively affluent urban society and a huge gap between the haves and have-nots.
I wonder if those numbers average by locality, seems like you would need to or it would get skewed by cheap real estate where people that live and work in expensive cities can't access (until companies embrace WFH and stop indulging management's obsession with butts in seats). Houses out in the country can be a great deal with a city income but it's tough to bring those two together.
It seems to assume everyone is married, for one. Can someone tell me why such a trivially-calculated and easily-cooked example is useful here? Is there a source for their numbers?
Also, why are they saying “disposable income” when what they mean is _all their income_?
From their info page:
“Note that there is no standard formula to calculate property price indices. Our formulas differs from Case-Shiller Index, UK Housing Price Index, etc.
Price to Income Ratio is the basic measure for apartment purchase affordability (lower is better). It is generally calculated as the ratio of median apartment prices to median familial disposable income, expressed as years of income (although variations are used also elsewhere). Our formula assumes and uses:
- net disposable family income, as defined as 1.5 * the average net salary (50% is assumed percentage of women in the workforce)
- median apartment size is 90 square meters
price per square meter (the formula uses) is the average price of square meter in the city center and outside of the city center
Small money company - while there might be impacts to the economy the scale of these companies is small. Ripple effects contained in China. Once something happens to a US company I'll start paying super close attention.
A major chunk of evergrande is owned by black rock and HSBC. The ripple effects will be felt beyond china. This is like saying the virus is only circulating in china. I will pay close attention when it starts in US.
I think the mortgage squeeze in china is far worse than the pandemic and they have done a good job of masking it. We will know in few months or years when the shock waves ripples thru here.
Granted, the extenstion is pretty much targeted at Desktop and it really only works in Firefox without a nag screen, but yeah, its whatr I was on my own rig and I can't remember the last paywall I came across.
Will the People's Bank of China be paying Evergrande's foreign debts (aka bonds)? How many derivative products were created off those in other markets? Will it be as bad as 2008/09 when Mortgage Backed Securities and their derivatives collapsed except this time it is Commercial Mortgage Backed Securities?
Just asking questions in case anyone closer to those business areas wants to chime in. I doubt there is transparency coming out of China about this.
I think it's pretty clear that China isn't going to bail them out like how the US bailed out our failed companies back in 2008.
China cares more about protecting the homebuyers and contractors who are building the homes more than protecting the investors [0][1]:
> Evergrande has almost 800 projects across China, many of them funded by advance payments from homebuyers.
> Local governments have ringfenced homebuyer deposits and other funds to ensure that Evergrande projects in their jurisdiction are completed and contractors paid on time.
So this is a much different reaction than the US government who protected the investors and banks.
The idea that the PRC will act to protect foreign economies or foreign investors is directly contradicted by every single thing the Chinese government have done the last two decades. If they basically allow Chinese citizens to outright steal corporations (See ARM China), why do you think they would step in here?
>So this is a much different reaction than the US government who protected the investors and banks.
It was mainly to prevent systemic collapse of the financial system. Banks and other financial institutions profiting from it is an 'unfortunate' side-effect.
> Will the People's Bank of China be paying Evergrande's foreign debts (aka bonds)?
No, why would they do that? They're saying that they'll pump money into the economy to prevent a price slump from causing other defaults, there's no expectation whatsoever that there will be any compensation to bondholders; losing money if the company defaults is part of the bond investment business. China might offer some assistance (e.g. subsidized loans) to some affected local companies for domestic policy reasons, but they're very unlikely to gift money to foreign investors in this case.
The vast majority of evergrandes debt is denominated in CNY not USD I think. Bear in mind how tightly china controls access to its markets and its currency isn't easily convertible.
In other words, there's probably far less spillover into the rest of the world because the rest of the world simply couldn't lend evergrande that much money in the first place.
Why would they? That would be like the US government bailing out the EU banks that invested in the 2008 real estate credit swap nonsense... oh, well, they bailed out the local banks at least.
China will value internal stability and safety higher then external investors.Internal lenders will get securities and partial payments, while BlackRock and other will be left holding the bag and getting a hair cut.
This results in private pensions funds being devalued, meaning alot of "early out" pensioners might return to working, if the investment collapse spreads. It will also continue to drive the market value of flats in western cities even more upwards, as they become a AAA-haven for china fleeing capital.
Yes it matters
Yes there will be contagion
No it won’t stop until the government (Xi and PBoC) agree on how bad it will get before they start bailing others out.
Now that too big to fail is dead in China, expect more failures, basically.
Beijing controls its banks. If it tells them to lend, they will lend, something the U.S. doesn’t have the power to do. There is zero risk of contagion within China’s borders because that is not a failure mode in a monolithic banking system.
To the degree contagion exists, it is at the sovereign level, in foreign investors decamping from China wholesale. China is less reliant on those than before. And there is no sign of that happening.
This is an entirely naive view, debt is debt even if it's domestic and funded by government funds. Evergrande is one of several high profile defaults now occurring with major property corporations in China. Cascading failure even slow failures will impact the national economy in really bad ways. These failures happen slowly and gradually and then all at once towards the end of a nations downward spiral.
A nation that overproduces manufactured goods but has to import food from foreign nations to feed it's own people and braces with power cuts even it's most industrial areas is in trouble. Put in a toxic debt scenario, reliance on foreign states for energy, worsening foreign relations and a pandemic and you have a recipe for cascading effects. This is the same path that the Soviet Union took and at one time they had taken lead in many areas such as space exploration. The Soviets also had the advantages of energy independence and plentiful natural resources. China has no such advantages and doesn't nearly have the overwhelming global power that the Soviet's did at their height. The Soviet Union could have been described as a global empire something that China hasn't yet achieved.
What makes the impending China collapse worse is the magnitude of debt levels and the impact on the global economy due to China's deep integration with it. They won't just go down but will take all other industrialized nations with them.
There's no government functions in China that have any ability for transparency, accountability or self-criticism. China's current militant "wolf-warrior" stance in world affairs telegraphs it's own insecurity. They internally know they're failing and the risk is increasing but can never admit it or take corrective actions because that would mean admitting their top leadership have made mistakes.
China's government is significantly more autocratic, though, which lets them do things like unilaterally pay out all of the creditors of a failed company using printed money.
Or alternately, order strategic companies to not fail and in fact be successful.
I'm not saying that's necessarily the best option but with that fine grained control over their economy, plus statistically some of the smartest humans who ever lived on the planet playing on their team, I'd be surprised if China's current power structure doesn't ride this out.
You realize that they've already repeatedly said they'd "bail out" people and groups affected by this? They just weren't willing to reward Evergrande's reckless behavior by giving them more money. Something the US should've done (so much for free market capitalism as a principle).
I don't think it's clear yet if they plan to bail out everyone or just Chinese-based people and groups. From my understanding, evergrande had a lot of international investors.
Can someone here enlighten me how a default can be "contagious"?
I could imagine that Evergrande bonds become worthless so that many investors will realize losses. But surely no one, or very few, will have invested mostly into Evergrande bonds, right? So presumably, everyone will realize a relatively small loss, no?
One firm defaults, all their investors lose a bit of money. Now that they've lost a bit of money, they will have less money to lend to other firms. Now those firms find it harder to service their debts (eg they were planning to roll over their loans with other loans), so some of them default.
A firm in the real estate business defaults. That makes people think other firms in that business will also default. So then all real estate businesses find it a a bit harder to borrow.
Add leverage. I buy a loan from a number RE businesses, but I don't just use the money in my pocket. I borrow it from the bank at a lower rate than what I receive from Evergrande. They go bust, bank asks me for money, I need to sell my other loans in the RE firms. Those loans will go down in value, reflecting higher rates and making it harder for the firms. This credit cycle is described by Soros in his books. Works both ways actually, when things are good it's the reverse.
That's the gentle dominoes falling version. Then there is the version where lending institutions completely rethink the risk in that sector. In that version they call loans and stop extending credit to same or similar businesses overnight. When Enron collapsed every other energy trading firm lost access to trading capital, taking out the entire sector. Whether or not energy companies should have been speculating in the futures market with borrowed money is a separate conversation.
> One firm defaults, all their investors lose a bit of money. Now that they've lost a bit of money, they will have less money to lend to other firms.
There's a lot more to it than that. You have to take into account 1) We have a fractional reserve banking system. When banks start individually calling in loans, there isn't enough "money" in the system for everyone to repay them. 2) Asset market prices (e.g., equities) reflect the present discounted values of expected future earnings. When everyone suddenly expects those future earnings to be less, the prices of those assets fall precipitously. That's not an issue in and of itself, except that those assets may have been purchased on margin (a loan) which depends on the value of those assets and may suddenly be called in for payment, forcing a liquidation of the underlying assets and further price falls. 3) As businesses scramble to pay loans that have been called and to adjust to a market where credit is difficult to come by (and businesses run on credit not cash) they reduce costs and often do so by laying off workers. This causes a reduction in aggregate demand (worker income) across the economy which further exacerbates the problem.
There is inherent instability in the system and all sorts of positive feedback loops that can amplify an initial shock. Suggest reading Irving Fisher and Hyman Minsky to understand more.
The neighbouring comments only give you a part of the answer. Yes there is psychological things, i.e., "if they default, could other default" that makes people more sceptical wrt to the same class of assets (in this case property handlers with exposure in China). But there is _also_ the thing that some institutional investors are only allowed to hold certain parts of their assets in certain risk classes.
The subprime crisis got triggered, by one-to-many defaults, which triggered a downgrade in the rating of the securities that the single loans were packaged into, which _forced_ institutional investors (think pension funds) to sell those, which depressed prices, which made the securities even more risky, which let to further downgrades and so on.
But there is also the point that the investors of Evergrande may have planned these payments for their obligations. Which, depending on their current stability, may make them unable to honour their obligations, which makes them go into default. Which can then trigger a downgrade of their rating and we are back to the setting above.
Unless you know about the exact structure and timing of all payments of all investors and how they cover their payments. There is really no way to be sure that it doesn't lead to a cascade. There is also no reason that it _has_ to lead to a cascade of course.
> Can someone here enlighten me how a default can be "contagious"?
The 2010 movie "Inside Job"[1] about financial crisis in US presents real-life examples, starting with the Icelandic financial crisis.
There is also this Warren Buffet interview[2] which presents his unique viewpoint on what happened in the US around the time Lehman Brothers defaulted in 2008. You probably won't gain any knowledge from it other(edit) than how the financial sector assigns blame.
The Icelandic finance minister was flying to the UK (or was it NY) to have some talks about the crisis, he was so worried about the banks collapsing, he brought cash in case his credit card stopped working while he was travelling...
You're making the flawed assumption that these other investors and players in the market have performed sensibly and are not in a similarly difficult position. This is probably not the case. The question is not only what the financial risk this poses to Evergrande's investors/creditors, but what other companies are suffering similar negative pressures that have pushed Evergrande this far into the red to begin with. If this were an issue isolated purely to Evergrande, then yes, systemically, the loss would be relatively isolated and generally well absorbed. The issue however is more widespread and systemic though, and as a result, Evergrande isn't the only one in this situation.
I'm not a financial advisor, I can't detail with any educated accuracy what specifically has transpired, but generally, the CCP has changed it's position and policies on lending to real estate companies and speculation in the real estate market. This is a policy shift in response to negative patterns in the market, namely but not limited to: supposedly large chunks of the real estate properties in china are sitting empty as people are buying them as part of their investment portfolios, artificially inflating pricing and perpetuating development far beyond practical demand, leading to a potential speculative bubble. As a result real estate developers were taking on debt to build new projects to expand their portfolios of real estate that were largely sitting empty and being used to borrow against to build more projects, artificially inflating price in response to their own demand to borrow against it... You can see how that can become an issue when the entire industry starts perpetuating that trend. It's an issue not isolated to Evergrande, they're just the biggest, and thus highest profile.
As a result, the "contagion" depends how bad things get with Evergrande, because they're not the only one in this difficult position. The issue is more-or-less systemic, and Evergrande is just the bellweather of sorts by virtue of them being the biggest. Of course there's lots of nuance here, as each individual corporations exact situation differs from each other, as does how the party might choose to deal with them, a number of other factors in play as well. But this should give a glimpse into why this isn't just Evergrande sinking or swimming.
> The question is not only what the financial risk this poses to Evergrande's investors/creditors, but what other companies are suffering similar negative pressures that have pushed Evergrande this far into the red to begin with.
Or more accurately, what the rest of the market believes to be true about these companies.
or fears is true because they don't have enough evidence to believe, and their prior beliefs just unravelled.
If you’re levered 10-1, you only have to lose 10% to get wiped out completely, and the firm that lent you that money will force you to liquidate to try to pay them back - a “margin call”. Even if it’s not a total wipeout, it’s likely you need to liquidate some assets to meet your margin as lenders reevaluate your risk to be higher than they thought. Enough people do that fast enough, and prices of other assets fall, others who are levered need to cover, and on and on until you have a widespread problem. Leverage is great on the way up and horrifyingly terrible on the way down.
A sale of assets will affect the prices and many of their competitors in real estate development are similarly indebted and on thin ice. Also, their contractors and suppliers will be stiffed and they probably don't have the same diversification opportunities.
I think this is a big thing. If everyone defaults at the same time, the property market just vanishes as everyone force-liquidates to manage the defaults. If that affects collateralization levels, it's even a positive feedback loop.
The RE companies that have good balance sheets will have great opportunities in the coming years.
1) For Evergrande itself, if it defaults on foreign debts, domestic lenders (banks, funds, individual investors) see this as a big crack on its promise to return investment. This might push them to ask for early repayment of previous loans, which only gets things worse for Evergrande.
2) Since Evergrande is one of the biggest realtors, investors naturally will reassess the risk factors for the whole industry. This will probably stop some funding from flowing into it plus higher interest rate. Again, this is bad for all players in the industry.
3) Realtors tend to delay payments to suppliers to enjoy some sort of "free loan". When things go bad, those payments are not going to be the first to be paid, if paid at all. Now the contagion moves to other industries and 1) and 2) are repeated there.
4) Now consider the banks/insurance companies/funds. People invest their money in these financial companies because they believe they can make money. Now that they actually lose money, investors are going to sell shares or/and withdraw money. This is actually the most vicious part of the cycle because financial corporations will have no choice but to fire sale some of their most precious/liquid assets (think US Treasury Bonds, stocks of favored companies such as AAPL/MSFT/GOOG, etc.) to cover the money withdrawn.
At step 4, if government doesn't step in, this will quickly (in maybe a few days) turn into a global financial crisis.
It will be a large part [0] of the portfolios of "wealth management products" [1], which will take large hits, which will then see redemptions from retail because these products are sold as being functionally riskless, which will then need to liquidate their other assets, which will per force fall in price, which will...
[0] Evergrande is the largest real estate developer and largest user of this type of financing in China, and is reasonably mid tens of percent or higher of some wealth management portfolios.
[1] These are investment products which aren't generally sold as such; they're effectively shadow banking. Most users do not understand that they actually are running material capital risk in return for their e.g. 8% annually.
If a company defaults and doesn't pay outstanding obligations to smaller vendors without much cash to keep it afloat, these smaller vendors also have to stop paying their vendors and fire workers to try to stay afloat, recursively
I saw this play out at several businesses at the start of the COVID-19 pandemic, until their business was deemed essential and they (along with their customers) were allowed to resume operations
(2) The default is reflective of the concern that Evergrande has no money, and although they've been able to stave off defaulting on other series of bonds so far, holders of all series of bonds should expect more defaults later unless Evergrande's debt is restructured. (source: https://www.nytimes.com/2021/12/09/business/china-evergrande...)
In terms of immediate impacts to global financial markets, it depends on the extent to which institutions were exposed to structured credit products that depend on Evergrande's solvency.
I'm not terribly familiar with US oversight into structured finance, but I'm all ears.
>Can someone here enlighten me how a default can be "contagious"?
1 persons income is another person's spending. Why would evergrande default anyway? Did they over lever? Definitely, but also their underlying revenues dried up. The war with china is feeling it's effects now.
Now that evergrande has defaulted, it means others who needed their money to pay their debts also can't. Afterall, many of them also will be feeling the pain that evergrande is feeling. The war with china didn't target evergrande, they are just the most levered and large enough to realize the pain.
The irony of it all, this is capitalist china that's hurting, but China needs capitalist china. If you excluded taiwan, HK, and the other capitalist china zones, china is far worse than greece. They'd have to cut so much that the peasants suddenly are living much worse. Peasant revolt incoming.
Apparently employees were told to invest in the company or they would be denied payment/bonuses. Feel sorry for everyone involved in this dumpster fire.
Sounds eerily similar to what happened during the Enron saga. So many employees tricked into keeping all their pension savings into the stock. Quite a sad story.
It's sad, but I think "tricked" is a simplification. Being tricked into thinking it was safer than it was, yes, but being tricked in order to boost the share price or maintain the company, I'm not so sure.
Even towards the end the CEO was taking out personal loans secured on his Enron shares... in order to buy more Enron shares. This was a big contributor to the snowball effect when the share price started falling. I think the top people at Enron honestly believed in the stock and were probably mostly pushing it for employees on this basis. That was pure hubris, thinking they were smarter than everyone else. They should have known better and some were rightfully prosecuted for their part, but it's a bit more complicated than saying the employees were "tricked".
As I understand it, this is actually very common in China. It's a weird mix of responsible business oversight and anti-trust action and just straight up corrupt wild west capitalism.
Maybe someone with more knowledge can explain this to me. When they defaulted, that means that they failed to pay back one of their debts, it does not mean that they are completely out of money, right? What stops them from selectively defaulting? Stop paying back some of the politically less important debts, and continue chugging on, servicing only certain debtors. I'd assume with unlimited political backing this should not be a problem.
OTOH I read somewhere that the political leadership is not amused and wants to make an example. Also, I would say China has benefited a lot from the international financial system and from the rules of international commerce, so they probably have to honor international debts.
The bond contracts explicitly cover this scenario, they contain language that ties all the bonds together. This is why the "did they technically default?" is important - the default on one bond triggers the protections for all the other bonds, even if their due date was far into the future, requiring Evergrande to split any repayments equally across the whole class of the bonds right now. They can choose how to prioritize their contracts until they default, but once they do, the choice is limited and their assets would (or at least should - legal enforcement may be tricky and take time) get split among the relevant debtors as contracted.
This depends on how tightly contracts are enforced. For all we know the government is the one telling Evergrande not to pay USD denominated bonds. What recourse do the bond holders have if the courts tell them to fuck off?
These bonds have a cross-default clause (not sure if correct term) which means if you default on one, you technically default on all of them (I guess exactly to prevent what you mean and screwing the lower ranked investors)
Exactly. What it means is now all creditors can “call” their loans and demand payment in full - which causes a “run on the bank” type stampede usually.
Unless it were made clear that only foreign creditors are going to get screwed, they will all call.
From reading the article, it seems they need to raise more money to actually resume many of their construction projects (which is where their revenue comes from), and because they are unable to repay existing debt, no one else wants to give them money.
Which is hardly surprising, given how insane the Chinese real estate bubble is. I understand there are entire ghost cities of extensive high-rise developments - sitting largely abandoned and owned as vacant second homes by Chinese private investors waiting to sell them on a profit thanks to an urban migration that might never happen.
Edit: I don't know why am I being downvoted. The Chinese real estate bubble has been rather well-documented, see e.g. this YouTube video: https://youtu.be/EgVXRtq5EIg
Most bond agreements have thought of that: nobody wants to be the one creditor defaulted on. So there's an agreement that any default is treated as a default on all.
That seems right. When people get into money trouble they will start skipping some debt payments first. The mortgage or rent is usually last to skip for obvious reasons.
It doesn't always mean what it looks like it means, FWIW. The dad of one of my close friends defaulted on a £600m loan, essentially 'strategically' in order to play hardball, and it got reported by lots of newspapers as if he'd gone bankrupt. I think a lot of people extrapolate from personal finances to business (or in that case HNW) finances, and it doesn't really work that way.
Readit News
> Bondholders of $19.2 billion in Evergrande dollar notes face deep haircuts as the company overhauls its mammoth balance sheet without a government bailout -- a process that promises to be long, contentious and potentially risky for Asia’s largest economy.
https://www.bloomberg.com/news/articles/2021-12-09/evergrand...
It might seem odd that a Chinese company would have taken out dollar loans, but the practice is common around the world. One reason is that the borrower can get lower interest rates because they assume the exchange rate risk themselves. If that bet goes sour, though, the borrower faces higher costs to service the debt.
Of course the thing about dollar bonds is that even if the national government were to intervene, those dollars can't be printed by Beijing.
The only way to service a dollar debt is to raise dollars. One path to doing that is to sell dollar-denominated assets. US Stocks and bonds in other words. So the pressures in China can spill over into the US economy through forced asset sales of dollar-denominated assets.
This is another angle to the contagion idea. Organizations around the world have taken big short position on the US dollar. As those loans come due, dollar assets are sold. Which drives the dollar higher. Which makes the dollar loans even more unsustainable. And so on.
It has been called the global dollar short squeeze:
https://www.lynalden.com/global-dollar-short-squeeze/
And if you're really adventurous, there's something called the "dollar milkshake theory" which predicts the uncontrollable rise of the dollar as (maybe counterintuitively) a wrecking ball for the world economy:
https://www.youtube.com/watch?v=2qTOWuL7Zco
The broader risk is an unwinding of Chinese holdings by foreign entities who suddenly realize that the Chinese government will have them foot the bill for bets gone bad, or simply bets that the Chinese government doesn't like. China has capital controls to manage these outflows.
Which all leads to the scenario where foreign investors in China's economy are probably going to get taken for a ride at some point. Arguably some companies like ARM are already in this situation but it's in everyone's interest to pretend they are not.
Yeah, I thought the same thing in 2008, then the haunting words "too big to fail" were used by both Obama and McCain, so it didn't care who won the presidential election, the banksters would still get a bail out. Fast forward to today, and it still doesn't matter whether a Dem or Rep sits in the oval office, the banksters will always have safety net.
Evergrande's USD-denominated debt is 20 billion, even if they wanted to cash it all out rather than just refinance it I doubt it would be such a huge wave.
Panicing investors fleeing to the USD safe haven seems more likely to cause trouble.
[0] https://www.thebalance.com/how-much-u-s-debt-does-china-own-... [1] https://www.ft.com/content/7ac2d661-5a63-4768-91a1-182f02b2a...
https://ticdata.treasury.gov/Publish/mfh.txt
A big part of the world economy is literally or effectively dollar-denominated, so a sale of dollar-denominated assets does not imply a sale of US stocks and bonds. You can sell just about anything for dollars.
During height of the 2008 financial crisis the Federal Resevere opened an currency swap facility with the Swiss National Bank and the ECB ultimately capped at $620 billion, with the express purpose of allowing the other central banks to bail out banks domiciled in their jurisdictions.
So with the cooperation of the Fed, it is possible for them to print dollars.
[0]https://fred.stlouisfed.org/series/M2SL
No, it's not an "exact opposite". If one accepts the premise that players in the economy do not always yell out all their motivations and fears on the most public channels they can find, which when examined directly seems obvious but people seem to forget about it a few seconds later and resume acting as if the news is in fact full of everyone's private motivations and fears, then one can easily harmonize these two theories into one by wondering if the reason the Fed is printing money like crazy is that they fear horrifying deflation brought on by a dollar squeeze, so they're trying to get ahead of it. Certainly once it starts happening it's too late to react.
It's not my personal first guess as to the Fed's primary motivation, but neither is it an idea too crazy to take seriously, and I could easily accept it as a secondary motivation.
The entire US economy has become dependent upon asset prices going up. The easiest way to achieve that is to make dollars go down. Conveniently, there is a branch of the government (The Fed) - who answers to no one - and who has the power to print dollars.
Sure, some American companies actually do things. But a startling amount of wealth in this country is tied up in R/E and derivatives. If dollars go up and asset prices go down - this explodes spectacularly.
The Fed chairmen are all relatively wealthy. IIRC, Ben Bernanke was - by far - the poorest Chairmen ever. At the time he was elected, he had a net worth of $2.5M - inflation adjusted would be >$5M.
That's still similar to the type of wealth you read about in Jane Austen books...
GME was easy. Hold the stock, sell it to the shorts. How do you do that with US dollars?
Secondly, as crazy as this sounds, would it be one reason for the Fed to preemptively drive inflation? (I suppose a low constant multiple in devaluation wouldn't blunt a short squeeze peak entirely, but might make it less sharp?)
If you believe OP, borrow as much foreign currency as you can and exchange it for USD. Back in 2007-2008, many Canadians emptied out their savings to buy USD at incredibly favorable exchange rates. Within a year or two they made over 30% as the CAD fell and the USD recovered.
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Man that seems like “doubling down” (I’m thinking of the gambling term) on a business bet…
This post shouldn't be construed as financial advice in any form.
Creation of more debt is creation of more money, increasing supply, and is inflationary.
Conversely, destruction of debt destroys money, and is deflationary, in this case, deflationary to the dollar.
Also, selling of dollar-denominated assets also decreases the dollar-value of those assets and so increases the value of the dollar.
But it is inflationary for the Chinese currency.
This is why with the Fed's QE programs since the 2008 crash everyon ehas been yelling "Inflation!!" for over a decade, yet there was none-negative until this year, and even that is arguably transient. So much money was destroyed in that crisis that they have been ever since then trying to fill in the (deflationary) hole.
To the extent that that debt is denominated in dollars and is about to be destroyed, it will be dollar-deflationary, not inflationary.
There is no equity market (that you can trust), bonds pay nothing so property is what you invest in (or you just sit on cash that is rapidly losing value during to inflation). Ownership is recognized even by corrupt bureaucrats and courts. Ownership papers are next to sacred documents. And no property tax so zero holding costs. The perfect investment.
No legally defined ownership? No problem! The developer is working on it. They just need $30,000 USD down to secure a plot. Ownership papers will follow.
So you pile your savings into real estate. You dump every single dollar you have into speculative real estate developments.. A single family home 10 km from a major city costs more than it does in California (~$1.5M USD) and local median wages are 1/10th that of the US. You can visit developments that are nothing more than 100 homes that are concrete shells with rusting window frames. Maybe 1% occupied.
But don’t get me wrong, some developments fill up super quick. But some just die.
Want to rent a place? Fuck you. Owners aren’t banking on rent, so pay them $3k per month. It’s all about appreciation. They would be happy to leave it empty. Less hassle that way.
Seems like a recipe for a major housing crash.
But why would houses appreciate if lots of them stay empty?
[1] https://archive.md/aU31p
To match the growth expansion of prices? Absolutely not.
An apartment not even within main cities or rather 2nd or 3rd tier cities will still cost 300-500k USD, is made of questionable design and safety, isn't much more than a concrete box, and you don't even full own the land but rent it from the builders who actually purchased the right from the CCP for 70 years.
What you've said is true, but that doesn't mean the problem in big Chinese city is anywhere easier - the housing price is beyond afforable even for the affluent salaries. In my experience, large cities in China are more like Hong Kong where people have to work over 50 years to afford a house rather than 27 years.
I live in Beijing, and the rent I pay is around $1100 per month, but the valuation of the house is conveniently around $1.1m - it's 1k months or 83 years. As a senior software engineer, I earn a pretty decent income but it would still cost me to work several decades to buy that.
As another example for your reference, a colleague of mine - he saved money for quite some years by renting basement and spend nothing other than necessities, bought an 60m² old khrushchyovka (that old poor commie block the western world always laughing at) for around $1m. His story is very typical in China: even though he is that hardworking, he didn't afford it on it's own, but also plus his wife and 4 of their in-laws (it's so common that in China we call it "drain 6 pockets").
This is in stark contrast to the private houses I know of the US which may be even hauled from A to B and in my perception are more of cardboard-quality.
I like how you say this like it's undoubtedly a good thing.
In Japan, old houses are rightfully considered depreciated as things like "severe regulations" and "low energy consumption" change over time as technology improves. Having a house built in the 1700s sure isn't going to be easy to solarize or insulate. So paying for 300+ years of that upfront seems pretty dumb.
In Austria, are there severe regulations on the safety of building and energy consumption of cars? I take it that it's very common to see 60, 70, 80 year old cars on the road there and they're not just disposable cardboard quality things, right?
I am sure there are parts of the Midwest that work the same way, but that's by and large not how the majority of the US works. Your heritage is refreshingly irrelevant, and therefore you can move freely from one place to another. Most people realize that big cities offer better career opportunities, and also that big cities suck for retirement. So you essentially see the following migration pattern:
1. [some place where you were born]
2. [your college town]
3. [career-related move to a bigger city]
(this part can repeat itself many times)
4. [retirement somewhere warm and/or affordable]
So if you're going to move somewhere in the range of 5+ times, why would you invest in a multi-generational home?
Finally, as an aside, interesting to note the correlation between the geographic and economic mobility: the American Dream may or may not be alive anymore, but I've seen so many kids from my college come from nothing and make a fortune (and shockingly, kids from good families end up as failures, mostly due to some sort of conflict with their family). I think the society in the US has accepted that there's a lot of uncertainty when it comes to predicting a kid's future.
That stuff simply doesn't happen in Austria on that scale - if you're poor, you'll stay poor, and vice versa. So a good family name leads to a good standing in the society, and the loop repeats itself (this is where your residence can also serve as a signal for your wealth to reinforce that loop). Why risk leaving all that and moving to a new city where you'd be starting from scratch?
There is nothing inherently wrong with stick built houses using drywall.
The UK perspective on old vs. new: newer houses tend to be tiny and feel less comfy even if built to stricter standards. Old houses come with more problems. In Edinburgh "New" Town (late 1700s), it's common to see cabling being run up the outside for things like broadband, because the building is of stone and there's no other sensible way to do it. Retrofitting all the old housing stock is going to be difficult-to-impossible.
Don't forget planning regulations. Gutting a building and effectively building a new one inside incurs far less paperwork (and possible objections!) than demolishing it and building a new one. The UK loves declaring anything and everything to be historic.
My house was built in 1916 and will easily last another 100+ years. Almost all the houses in my neighborhood were built around the same time and are still standing in good condition. Yes it's a wood house and yes wood houses can last a long time.
In most of these places with insane house price to income ratio, it’s the land, not building costs that contribute most of the price.
That being said, what's important about a house is the foundation and the roof. The foundation of mine is as good as any in Europe. The roof, well, asphalt shingles on top of 5/8" plywood on top of roof trusses. Ho hum. But such a roof and attic can be properly maintained, which means keeping it vented even when there are 3 feet of snow on the roof - the modern pagoda style vents go a long way to solving that problem - to avoid ice dam issues, and of course replacing the shingles every 20-30 years.
It is possible to get European style masonry roofs here. Perhaps such a roof over a properly insulated and vented (i.e. cold!) attic would work here. I see them here and there but don't know anyone personally who has one.
I have encountered the occasional North American house owned by traditional Europeans. And they looked just as nice and impeccably maintained as any in Europe. And while maintained this well, will last for centuries. Unmaintained, they certainly deteriorate more quickly.
Moving up a step is American style 2"x4" framed houses. These are typically built on a concrete foundation, but the structure is formed by inexpensive lumber. This system was designed to go up fast and cheaply, substituting more cheap lumber rather than any sophisticated carpentry [$]. This cheapness offers a home to more people, at the expense of craftsmanship and (probably) longevity. The cheap construction allows people to build enormous homes if they have the means, displaying wealth through sheer size rather than higher quality construction (the resulting homes are mockingly called a "McMansion", a joke pointing out that a big McDonalds hamburger is still... McDonalds quality. A blog making fun of these McMansions can be found here: https://mcmansionhell.com/
However, if you don't want a cheaply constructed home, you don't have to have one! You can find a builder that will build a home to your specifications. This will of course be more expensive, as you aren't tying into the continent sized supply chain for the cheaper construction, but if you prefer quality work, you can certainly make that tradeoff.[-]
In any event, it is usually the land under the home that truly appreciates, not the structure itself. This dynamic broadens the wealth divide between mobile home owners and owners of the second and third type of house. Mobile homes are often placed in "trailer parks", where the owner of the home rents a space to park their trailer, meaning they don't participate in any land value appreciation (and in fact will see their rent go up if the land appreciates).
Still, the focus on cost, and the several levels of price-point allow more people to be housed. The fundamental question is "is it better for a person to have a low quality house, or no house at all?" It seems that Austria has chosen the second, while the US chooses the first.
[&] When I loaded this page searching Montana (a remote, low population, low income state), I see some listings between $20-30 thousand USD. This is incredibly inexpensive, and affordable by basically anyone with a job in the US. https://www.zillow.com/mt/mobile/?searchQueryState=%7B%22pag...
[$] Notice all the focus on cost and speed on this technical manual for the system https://www.civilengineeringx.com/bdac/Stud-Wall-Constructio...
[-] This reference specifies a ~$300,000 USD cost for a timber framed house, quite a bit more than the mobile home variety!
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You can't by a tear down in Toronto, Vancouver, Montreal, etc for under a million. Houses rise in value at a rate of about $$1500-2000 a week (for years) while wages have been stagnant for decades. You could have bought a house for 450k-500k in 2005 and sold today for 2 million. I've seen condos that were 175k in 2006 sell for 850k today. You can't even buy a shack out side the city for less than 500k and most are going for over a million or two.
Average price of a house in Toronto will be over 4-5 million in the next decade while the average wage will still be 45-65k.
https://www.realtor.ca/real-estate/23885137/80-49e-avenue-mo...
I thought we all had it really bad. Apparently not.
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Ghana prices are completely bonkers. You have to work 100+ years to own property. Despite a expected life span of ~62 years and a population density somewhere in the middle grounds.
Something went utterly wrong I'd say.
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It seems to assume everyone is married, for one. Can someone tell me why such a trivially-calculated and easily-cooked example is useful here? Is there a source for their numbers?
Also, why are they saying “disposable income” when what they mean is _all their income_?
From their info page:
“Note that there is no standard formula to calculate property price indices. Our formulas differs from Case-Shiller Index, UK Housing Price Index, etc.
Price to Income Ratio is the basic measure for apartment purchase affordability (lower is better). It is generally calculated as the ratio of median apartment prices to median familial disposable income, expressed as years of income (although variations are used also elsewhere). Our formula assumes and uses:
- net disposable family income, as defined as 1.5 * the average net salary (50% is assumed percentage of women in the workforce) - median apartment size is 90 square meters price per square meter (the formula uses) is the average price of square meter in the city center and outside of the city center
...”
I think the mortgage squeeze in china is far worse than the pandemic and they have done a good job of masking it. We will know in few months or years when the shock waves ripples thru here.
Granted, the extenstion is pretty much targeted at Desktop and it really only works in Firefox without a nag screen, but yeah, its whatr I was on my own rig and I can't remember the last paywall I came across.
Just asking questions in case anyone closer to those business areas wants to chime in. I doubt there is transparency coming out of China about this.
China cares more about protecting the homebuyers and contractors who are building the homes more than protecting the investors [0][1]:
> Evergrande has almost 800 projects across China, many of them funded by advance payments from homebuyers.
> Local governments have ringfenced homebuyer deposits and other funds to ensure that Evergrande projects in their jurisdiction are completed and contractors paid on time.
So this is a much different reaction than the US government who protected the investors and banks.
[0]: https://www.ft.com/content/6d6b1f79-52b3-49e5-aa8a-7068adec7...
[1]: archive.is link of [0] https://archive.ph/GKWmv
It was mainly to prevent systemic collapse of the financial system. Banks and other financial institutions profiting from it is an 'unfortunate' side-effect.
No, why would they do that? They're saying that they'll pump money into the economy to prevent a price slump from causing other defaults, there's no expectation whatsoever that there will be any compensation to bondholders; losing money if the company defaults is part of the bond investment business. China might offer some assistance (e.g. subsidized loans) to some affected local companies for domestic policy reasons, but they're very unlikely to gift money to foreign investors in this case.
In other words, there's probably far less spillover into the rest of the world because the rest of the world simply couldn't lend evergrande that much money in the first place.
This results in private pensions funds being devalued, meaning alot of "early out" pensioners might return to working, if the investment collapse spreads. It will also continue to drive the market value of flats in western cities even more upwards, as they become a AAA-haven for china fleeing capital.
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Yes it matters Yes there will be contagion No it won’t stop until the government (Xi and PBoC) agree on how bad it will get before they start bailing others out.
Now that too big to fail is dead in China, expect more failures, basically.
https://t.co/TXNfUdoVi5
Beijing controls its banks. If it tells them to lend, they will lend, something the U.S. doesn’t have the power to do. There is zero risk of contagion within China’s borders because that is not a failure mode in a monolithic banking system.
To the degree contagion exists, it is at the sovereign level, in foreign investors decamping from China wholesale. China is less reliant on those than before. And there is no sign of that happening.
About 20%-30% of the sector is now pricing in default.
Yes the local banks matter, but as we just saw, international dollar bonds can and will default these cos
A nation that overproduces manufactured goods but has to import food from foreign nations to feed it's own people and braces with power cuts even it's most industrial areas is in trouble. Put in a toxic debt scenario, reliance on foreign states for energy, worsening foreign relations and a pandemic and you have a recipe for cascading effects. This is the same path that the Soviet Union took and at one time they had taken lead in many areas such as space exploration. The Soviets also had the advantages of energy independence and plentiful natural resources. China has no such advantages and doesn't nearly have the overwhelming global power that the Soviet's did at their height. The Soviet Union could have been described as a global empire something that China hasn't yet achieved.
What makes the impending China collapse worse is the magnitude of debt levels and the impact on the global economy due to China's deep integration with it. They won't just go down but will take all other industrialized nations with them.
There's no government functions in China that have any ability for transparency, accountability or self-criticism. China's current militant "wolf-warrior" stance in world affairs telegraphs it's own insecurity. They internally know they're failing and the risk is increasing but can never admit it or take corrective actions because that would mean admitting their top leadership have made mistakes.
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Or alternately, order strategic companies to not fail and in fact be successful.
I'm not saying that's necessarily the best option but with that fine grained control over their economy, plus statistically some of the smartest humans who ever lived on the planet playing on their team, I'd be surprised if China's current power structure doesn't ride this out.
that's a bailout, and that is what the CCP wants to avoid being seen as doing.
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I wouldn't be surprised if this would only cover domestic bond owners.
I could imagine that Evergrande bonds become worthless so that many investors will realize losses. But surely no one, or very few, will have invested mostly into Evergrande bonds, right? So presumably, everyone will realize a relatively small loss, no?
A firm in the real estate business defaults. That makes people think other firms in that business will also default. So then all real estate businesses find it a a bit harder to borrow.
Add leverage. I buy a loan from a number RE businesses, but I don't just use the money in my pocket. I borrow it from the bank at a lower rate than what I receive from Evergrande. They go bust, bank asks me for money, I need to sell my other loans in the RE firms. Those loans will go down in value, reflecting higher rates and making it harder for the firms. This credit cycle is described by Soros in his books. Works both ways actually, when things are good it's the reverse.
There's a lot more to it than that. You have to take into account 1) We have a fractional reserve banking system. When banks start individually calling in loans, there isn't enough "money" in the system for everyone to repay them. 2) Asset market prices (e.g., equities) reflect the present discounted values of expected future earnings. When everyone suddenly expects those future earnings to be less, the prices of those assets fall precipitously. That's not an issue in and of itself, except that those assets may have been purchased on margin (a loan) which depends on the value of those assets and may suddenly be called in for payment, forcing a liquidation of the underlying assets and further price falls. 3) As businesses scramble to pay loans that have been called and to adjust to a market where credit is difficult to come by (and businesses run on credit not cash) they reduce costs and often do so by laying off workers. This causes a reduction in aggregate demand (worker income) across the economy which further exacerbates the problem.
There is inherent instability in the system and all sorts of positive feedback loops that can amplify an initial shock. Suggest reading Irving Fisher and Hyman Minsky to understand more.
The subprime crisis got triggered, by one-to-many defaults, which triggered a downgrade in the rating of the securities that the single loans were packaged into, which _forced_ institutional investors (think pension funds) to sell those, which depressed prices, which made the securities even more risky, which let to further downgrades and so on.
But there is also the point that the investors of Evergrande may have planned these payments for their obligations. Which, depending on their current stability, may make them unable to honour their obligations, which makes them go into default. Which can then trigger a downgrade of their rating and we are back to the setting above.
Unless you know about the exact structure and timing of all payments of all investors and how they cover their payments. There is really no way to be sure that it doesn't lead to a cascade. There is also no reason that it _has_ to lead to a cascade of course.
The 2010 movie "Inside Job"[1] about financial crisis in US presents real-life examples, starting with the Icelandic financial crisis.
There is also this Warren Buffet interview[2] which presents his unique viewpoint on what happened in the US around the time Lehman Brothers defaulted in 2008. You probably won't gain any knowledge from it other(edit) than how the financial sector assigns blame.
edit: word "other" added in previous paragraph
[1] https://www.youtube.com/watch?v=T2IaJwkqgPk "Inside Job (2010 Full Documentary Movie)"
[2] https://www.youtube.com/watch?v=k2VSSNECLTQ "Warren Buffett Explains the 2008 Financial Crisis"
I'm not a financial advisor, I can't detail with any educated accuracy what specifically has transpired, but generally, the CCP has changed it's position and policies on lending to real estate companies and speculation in the real estate market. This is a policy shift in response to negative patterns in the market, namely but not limited to: supposedly large chunks of the real estate properties in china are sitting empty as people are buying them as part of their investment portfolios, artificially inflating pricing and perpetuating development far beyond practical demand, leading to a potential speculative bubble. As a result real estate developers were taking on debt to build new projects to expand their portfolios of real estate that were largely sitting empty and being used to borrow against to build more projects, artificially inflating price in response to their own demand to borrow against it... You can see how that can become an issue when the entire industry starts perpetuating that trend. It's an issue not isolated to Evergrande, they're just the biggest, and thus highest profile.
As a result, the "contagion" depends how bad things get with Evergrande, because they're not the only one in this difficult position. The issue is more-or-less systemic, and Evergrande is just the bellweather of sorts by virtue of them being the biggest. Of course there's lots of nuance here, as each individual corporations exact situation differs from each other, as does how the party might choose to deal with them, a number of other factors in play as well. But this should give a glimpse into why this isn't just Evergrande sinking or swimming.
Or more accurately, what the rest of the market believes to be true about these companies.
or fears is true because they don't have enough evidence to believe, and their prior beliefs just unravelled.
The RE companies that have good balance sheets will have great opportunities in the coming years.
1) For Evergrande itself, if it defaults on foreign debts, domestic lenders (banks, funds, individual investors) see this as a big crack on its promise to return investment. This might push them to ask for early repayment of previous loans, which only gets things worse for Evergrande.
2) Since Evergrande is one of the biggest realtors, investors naturally will reassess the risk factors for the whole industry. This will probably stop some funding from flowing into it plus higher interest rate. Again, this is bad for all players in the industry.
3) Realtors tend to delay payments to suppliers to enjoy some sort of "free loan". When things go bad, those payments are not going to be the first to be paid, if paid at all. Now the contagion moves to other industries and 1) and 2) are repeated there.
4) Now consider the banks/insurance companies/funds. People invest their money in these financial companies because they believe they can make money. Now that they actually lose money, investors are going to sell shares or/and withdraw money. This is actually the most vicious part of the cycle because financial corporations will have no choice but to fire sale some of their most precious/liquid assets (think US Treasury Bonds, stocks of favored companies such as AAPL/MSFT/GOOG, etc.) to cover the money withdrawn.
At step 4, if government doesn't step in, this will quickly (in maybe a few days) turn into a global financial crisis.
[0] Evergrande is the largest real estate developer and largest user of this type of financing in China, and is reasonably mid tens of percent or higher of some wealth management portfolios.
[1] These are investment products which aren't generally sold as such; they're effectively shadow banking. Most users do not understand that they actually are running material capital risk in return for their e.g. 8% annually.
There are first-party WMPs and non-first-party WMPs which bundle and resell either bonds or first-party WMPs, etc etc. For more generally, see https://www.reuters.com/world/china/what-are-chinas-wealth-m...
I saw this play out at several businesses at the start of the COVID-19 pandemic, until their business was deemed essential and they (along with their customers) were allowed to resume operations
(1) The rating downgrade that Fitch gave Evergrande to the default on one series of bonds may trigger accelerated repayment covenants in other bonds (source: https://www.aljazeera.com/amp/economy/2021/12/9/bb-chinas-ev...)
(2) The default is reflective of the concern that Evergrande has no money, and although they've been able to stave off defaulting on other series of bonds so far, holders of all series of bonds should expect more defaults later unless Evergrande's debt is restructured. (source: https://www.nytimes.com/2021/12/09/business/china-evergrande...)
I'm not terribly familiar with US oversight into structured finance, but I'm all ears.
1 persons income is another person's spending. Why would evergrande default anyway? Did they over lever? Definitely, but also their underlying revenues dried up. The war with china is feeling it's effects now.
Now that evergrande has defaulted, it means others who needed their money to pay their debts also can't. Afterall, many of them also will be feeling the pain that evergrande is feeling. The war with china didn't target evergrande, they are just the most levered and large enough to realize the pain.
The irony of it all, this is capitalist china that's hurting, but China needs capitalist china. If you excluded taiwan, HK, and the other capitalist china zones, china is far worse than greece. They'd have to cut so much that the peasants suddenly are living much worse. Peasant revolt incoming.
Cash is cash and when they don’t get paid their Evergrande bond repayment they can’t repay their debt obligations.
Who's next? Get out of that as fast as possible
Enough people think like that, hey presto
Even towards the end the CEO was taking out personal loans secured on his Enron shares... in order to buy more Enron shares. This was a big contributor to the snowball effect when the share price started falling. I think the top people at Enron honestly believed in the stock and were probably mostly pushing it for employees on this basis. That was pure hubris, thinking they were smarter than everyone else. They should have known better and some were rightfully prosecuted for their part, but it's a bit more complicated than saying the employees were "tricked".
OTOH I read somewhere that the political leadership is not amused and wants to make an example. Also, I would say China has benefited a lot from the international financial system and from the rules of international commerce, so they probably have to honor international debts.
Unless it were made clear that only foreign creditors are going to get screwed, they will all call.
Edit: I don't know why am I being downvoted. The Chinese real estate bubble has been rather well-documented, see e.g. this YouTube video: https://youtu.be/EgVXRtq5EIg
[0]: https://www.youtube.com/watch?v=jyvMx96zcdc
Most bond agreements have thought of that: nobody wants to be the one creditor defaulted on. So there's an agreement that any default is treated as a default on all.
(see also the long running Argentina "pari passu" fiasco: https://www.creditslips.org/creditslips/2020/01/a-cautionary... )
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