As a lay person, it has been extremely difficult to figure out what is going on. I have a weak grasp on four points(with low confidence on any of them being completely accurate):
1. There is an excess supply of apartments including the ones that have already been sold. The demand side is mostly people buying second and third units as investments.
2. China is going through a weird demographic situation. The younger generations are significantly fewer in number, they will need fewer apartments to live in.
3. Chinese provincial governments raise money by developing land and continue to be incentivized to build/approve/encourage a lot of apartment units.
4. All of this is funded with mortgages.
Thing is, all four of these can not possibly be right. It’s a little too insane. Whoever is on the other side of all those mortgages should have abandoned ship a long time ago otherwise.
What am I missing?
Who is holding all that mortgage debt? Who is continuing to issue more of that debt? When do the number of people selling their investment properties exceed the number of younger generations looking to buy their first primary residence?
These questions indicate a misunderstanding of how markets inside China work. I suggest you don't look at "what makes sense" but more look at the reality of what's happening.
What you are also missing is that sometimes, parties are not allowed to abandon ship. Couples who have bought homes with mortgages but are not moved in for years are not allowed to give up, they are not allowed to stop paying on threat of imprisonment.
The organizations on the countersign are also not allowed to give up on mortgages because the existence of their company is at the will of the government.
There was an uprising where people banded together and just stopped paying their mortgages and basically threatened the local police to mass arrest them, and that's one of the things that spurred the greater bankruptcy, because the government didn't really want to arrest all the people, cause that would indicate they are not in control. And seeming to be in control is what the government will opt for every single time in every single decision they make.
> And seeming to be in control is what the government will opt for every single time in every single decision they make.
That reminds me of when the Battlefield 4 game was banned in China, because one of the antagonists was a rogue Chinese general.
I remember thinking that the game would have had better odds if the plot had been about a unified and monolithic Chinese government doing willful evil instead.
An autocratic government running a fiat currency economy is a dangerous thing. On the one hand they can engineer the economy quite deeply. On the other hand, the imbalances are hidden and thus likely to be worse then they would ever be in a liberal democracy. But China has many centuries of track record running a command economy.
1.) "The demand side is mostly people buying second and third units as investments." that is incorrect. Most purchases are first purchases from couples that want to get married, and a home purchase is a required dowry from men that they need in order to get approved for marriage from the parents.
There are famous online videos from newlyweds that purchased a condo from a few years ago, and have been documenting their journey, and they still haven't received the unit. Meanwhile their kid was born already.
3.) Nope. China’s government land sales revenue declined for the 19th consecutive month in July. Land sales fell 10.1% from a year earlier in July, after declining 24.3% the previous month https://www.reuters.com/article/china-economy-landsales/chin...
Note that recent low birthrate i.e. (2) does not immediately map to shrinking real estate demands: young people born 20-30 years ago are still moving to cities, looking for a job, and a place to sleep in, hopefully with not-too-long commutes. There will still be a bunch of young couples trying to get a home and being ruined by unfinished construction like you've mentioned.
> Thing is, all four of these can not possibly be right. It’s a little too insane. Whoever is on the other side of all those mortgages should have abandoned ship a long time ago otherwise.
Why can't all 4 of these be right? "A little too insane" defines every bubble in hindsight.
Point to a bubble w/ a collapse and I'll give you a set of statements that are "a little too insane" such that fundamentals don't hold up.
My guess is you're gobsmacked by the idea that the fundamentals don't hold up and are saying "how can anyone be that stupid?". They didn't in 99, nor 08, nor Gamestop, nor now.
Everything can be wrapped under Greed.
[Edit] Full disclosure, I'm no better - I've lost money chasing greed.
GameStop? that wasn't a bubble, everyone buying it knew fully well that there are no fundamentals and that they are buying it to cause a short squeeze on hedge funds who shorted too much stock. Some of them got huge gains, others kept chasing the trade after it was over.
But it definitely wasn't a bubble. It was a good trade and there were some FOMO losers who kept chasing it more than they should.
I think it's too simplistic to blame it on greed. It's other things like, "I can't get married if I don't have a home to my name", or, "we want to have an investment to take care of ourselves in old age and there is literally nothing else we can out our money into"
On the policy side, it's very much "property taxes are the only way local government can secure revenue and so we must do whatever we can to keep the bubble inflated"
Google "Andrew Left citron research evergrande". He explained it all in 2012, was banned from Hong Kong trading for 5 years as a result, just when Evergrande finally grew its ponzi scheme too big.
Long story short: the head of Evergrande was politically connected, helped build China on borrowed money, had no credible plan to ever repay all these loans, one day China decided to stop leveraging and Evergrande had to unwind... except it couldn't because it didn't have enough actual money to repay loans quickly. Too bad their bonds were sold to everyone and their grandmothers in China to try to find yields in the no-interest environment. Now that interest rates are back, nobody want junk Evergrande bonds anyway. Catch-22.
> 2. China is going through a weird demographic situation. The younger generations are significantly fewer in number, they will need fewer apartments to live in.
That's not really the issue. I doubt the younger generation can afford it. The problem is where the wealth is going - as in those with the $$$.
> The demand side is mostly people buying second and third units as investments.
No, at least not always. At some point you weren't allowed to buy more than 1 or even use your funds openly this way.
So to wrap up - those with wealth lost or have lost trust with China / the government and are withdrawing at alarming rates, e.g. to overseas. Due to how COVID was handled and many other cases where your wealth could just disappear - people now rather keep their $$$ elsewhere - not back "home".
Due to capital controls, most regular Chinese who lack CCP connections can't legally keep their savings "elsewhere". Speculative investments in residential real estate have been the only game in town.
I think the demographics aren't in a "weird situation" ... they have significant population decline. Baby boomers is a generation across the planet with varying years in each region or country and generations behind them are smaller everywhere. China also had a 1 child policy for a long time so this has resulted in fewer people. Fewer people (smaller generation) having fewer people results in fewer people, which ... you get it. You can't create more 30-40 year olds right now. Massive real estate growth doesn't correlate with the population. Either people or companies are going to get stuck with the costs, I doubt the government is going to prop up the company.
The problem started long time ago when the central government took most of the tax revenue from the local provincial and city governments leaving them without funding to operate. As a compensation, they were granted the authority to sell the land use right of their lands. Land is never privately owned in China. What is sold is the right to use the land for a period of time.
Since the state owned all the lands and the local governments as the sole supplier of lands, they became a monopoly in land sale. As with any monopoly especially a unchecked one they pushed to raise prices all the times to gain maximum profit. The regulation and policies of the governments aimed to build more and to keep raising the property price years after years because that's what brought in the money.
It has become unsustainable as people couldn't afford the high price. There're a glut of houses and sales have been slow yet the governments have prohibited the lowering of the price as lower housing price means lower tax revenue. There're some cases when developers lowered the price and got hit with huge fine and jailed.
High price and slow sales mean the developers like Evergrande cannot get rid of the inventory to get the capital back to fund further development. They have already sold the not-yet-built houses for the next phase but have run out of money. Couple years back the central government had forced the banks to put in severe limits on loans to the developers. They turned to shadow banks like investment fund trusts to raise money but those are blowing up just now, defaulting on bond payments. They have no money to finish the projects. They owe huge amount of debts, owe huge amount of unpaid taxes, and owe the unbuilt houses to customers. They should have been bankrupted a long time ago but the governments won't let them.
This is a huge problem for China. Housing development comprises about 25%~30% of GDP; its blowup would cripple the economy. Most ordinary people's wealth are largely tied to the value of their homes; a large drop of the house value hits most people hard, forcing them to cut back on spending, further putting down the economy. The financial institutes like banks, shadow banks, investment funds, etc have lost huge amount of money as developers unable to pay back their loans and people defaulting on their mortgages. The lowering of the property value would force more loans gone underwater. There'll be a string of bankruptcy. The local governments have large revenue shortfall and yet saddled with huge debts, because guess what, they were in the game to invest to build housing. The shortfall forces them to lay off workers, cut back on salaries, cut pensions, and cut back on services. Even the central government has no money. Last year they openly said that beyond some emergency fund there's no money left.
Any option for solutions is a bitter pill and no one has the political will to do it. It's just a downward spiral.
The end game is a political crisis. Chinese peopple tolerated the semi-dictatorship of the CCP while the economy appeared to be booming. If the economy collapses there's going to be a very unpleasant - likely violent - crisis of legitimacy.
It's one reason China is pushing a BRICs currency. If China can print its way out of this disaster there's some hope of mitigation - messy, but not fatal.
If that doesn't happen there's a good chance of a financial and political implosion, with possible Western contagion.
"The financial institutes like banks, shadow banks, investment funds, etc have lost huge amount of money"
My understanding of the core problem is - Money has to come from somewhere. It is the result of China becoming world's workshop. Chinese have 45%+ saving rate and those powered up the FIs' balance sheets. This money funded all the buying of land rights, development of housing etc. How Chinese govt. deals with these toxic balance sheets before Chinese people decide to make a run for the banks, that will determine how this crisis unfolds. Ultimately there never is free lunch, unless you are the US which can print it's way out of any problem it creates for itself - what times!
(be aware - the comment is by some anonymous guy on the Internets. Its most value maybe as a 'mildly entertaining conjecture'.
> The younger generations are significantly fewer in number, they will need fewer apartments to live in.
Not necessarily, living space per person could increase faster.
> all funded through mortgages
All promised future work is debt by definiton. with real estate being 70% if Chinese wealth, it has to be public debt, whether in the form of mortgages or government debt.
As an aside, but related to this topic, I can't wrap my head around on how one can purchase an apartment. My house's warranty deed explicitly defines the property I own, with references to plat maps that have very specific survey measurements, etc.
But if I buy a slice of a high rise building, what does the deed say? What does the plat map look like? Do I just own an N% slice of the underlying land? Do I own specifically the portion of the building that is M inches from the top of the foundation to M + Q inches above it, and X inches from the Northwest corner of the structure, etc?
For rentals, it's straightforward, since the owner pre-specifies the dimensions of the unit numbers. But how does one "own" a section of a multi-tenant structure? How does one insure just their unit, if fire and other damage risk is shared?
Have you considered what ownership in a company looks like? Even your plat map of the land, how much of the land do you own? Can you dig it looking for things? Can you regrade it?
And the very specific survey measurements are going to be based on landmarks that were likely planted for the purpose of making the survey work. Heaven help you if you have seismic activity move anything around.
That is, all of this only works because we define it to do so. You can do the same with a high rise. Condos are very common and have well defined common areas and housing spaces. Things get more complicated when you consider time share ownership.
In China the state owns all the land so this is less of a concern I guess. In the US there's usually some sort of HOA that you get a vote in that owns the land.
I've always wondered the same, and understood it as "owning the airspace" within the specific unit, but not having any ownership of a physical structure. No control over the maintenance of the building would be a concern -- seems very an extreme version of "neighborhood deterioration" could easily occur.
I know plenty of people in the US who own condos (usually part of a pair e.g. 1A/1B), but outside of major cities the idea of owning an "apartment" (a unit in a huge building full of hundreds of other units) is somewhat foreign. However, my relatives in eastern Europe own these types of apartments as their primary investment vehicle due to poorly performing native currency / stocks.
----
via ChatGPT:
"The ownership of an apartment or condominium within a multi-unit building is indeed different from owning a single-family home. Here's how it typically works:
### Deed and Plat Map
1. *Deed*: The deed for a condominium or apartment within a high-rise will usually refer to a "unit" as defined in a "master deed" or "declaration" that has been recorded for the condominium. It will contain a description of the unit and any associated "common elements" that you may have an ownership interest in (e.g., shared hallways, gardens, and sometimes amenities like a gym or pool).
2. *Plat Map*: This would typically include a map of the entire complex, including the boundaries and location of each individual unit, along with common areas. These maps are often extremely detailed and have to be filed with a local government office.
### Ownership Structure
1. *Air Space*: In essence, you own the "air space" confined by the boundary walls of your unit, sometimes specified down to the paint on the walls. The structural elements, building exterior, and common areas are usually considered "common elements" owned collectively by all unit owners.
2. *Percentage Ownership*: Yes, you often own a percentage of the common elements, including the land upon which the building is constructed. This is sometimes proportional to the size of your unit as a percentage of the total building or complex size.
### Insurance and Liability
1. *Individual Insurance*: You would typically have a specialized form of homeowner's insurance known as an HO-6 policy that covers the internal elements of your unit (fixtures, improvements, personal property, etc.) and may provide liability coverage for incidents within your unit.
2. *Master Insurance*: The homeowners' association (HOA) will generally have a "master" insurance policy covering damage to the common elements and the overall structure. This is funded by HOA fees collected from the unit owners.
3. *Shared Risk*: The risk is essentially communal, but individual unit owners are usually responsible for the deductible on the master policy for damages originating in their units. Some complex scenarios could involve subrogation between the individual and master policies.
Understanding your specific rights and responsibilities when purchasing a unit in a multi-unit structure is crucial, and legal counsel is usually advised to navigate the complexities. Always read the declaration, by-laws, and any rules and regulations to understand your ownership fully."
Aside from 2) Is it not basically the same as the US mortgage crisis, except a bigger magnitude? That it could get worse shouldn't be surprising since China doesn't exactly promote liquidity of information.
Evergrande sells apartments before they are built to fund construction, and the purchasers pay mortgages during the build. If the company has insufficient funds to complete ongoing construction, which gets delayed, purchasers stop paying their mortgages and the company goes into a death spiral. Meanwhile purchasers get shafted, buildings stand uncompleted, and construction workers and materials suppliers see demand collapse.
Note this isn't merely a Chinese thing. A variation of this is in fact the default way new units get build and sold in the Netherlands, for example.
Personal anecdote. I had a mortgage for 2 full years before being able to move in to my apartment because I bought it before a single stone was laid. The way this works here is that the money is held into an escrow account for most of time, with the construction company only receiving payments in installments (e.g. 'roof finished'). Lastly, the final 5% of the purchase amount is held back until 3 months after the unit is finished, which can be extended if large defects are found. Bankruptcy risk was covered with an insurance, which was a condition to the mortgage.
This creates a situation where developer and homeowner interests aren’t aligned. Once the developer receives the money, they are not incentivized to deliver the house on time or do quality construction.
The other model, where investors fund development before the house is sold, aligns both parties. The developer/investor wants to produce a good product so that it will sell at a high price and the buyer has the chance to inspect the property before purchasing.
TLDR: there's a huge regulatory crisis going on in both the US and China markets (again). Now the failure of 1 large entity can crash entire empire(s).
Basically the same corruption that societies have been battling ever since societies existed.
It's a bit more complicated than that even if they have delivered all the houses. If they owe other companies huge amounts of money that they issued through debt bonds (and sold internationally), then it can affect companies and banks that are not related.
Their physically ability to deliver homes is not what's at stake here.
It's not a problem in itself, but a sign of the destress the company is in. Evergrande has huge debts and is struggling to pay suppliers. It has started (or received payments for) hundreds of thousands of units that could be abandoned if the company goes bust (many already are), leaving many people with nothing but mortgages for property that doesn't exist.
These probably aren’t the homes Evergrande has sold, mostly in south China. Ordos Kangbashi will never be populated because coal is on the way new out, a true ghost city that is only categorized as a success via goal post moving and lots of demolition (Ordos itself isn’t a ghost town, just this new district).
The article talks about buildings in kunming being demolished. While kunming definitely went through a big bubble, I would hardly call it a ghost town now.
Evergrand and other I-companies all tried to become "everything" companies.. They invested heavily into other parts of the Chinese economy. Like ecars, manufacturing etc. and these parts are now going bankrupt too. I guess the ccp has about one or two years left, it will not weather this storm. To many life savings, dreams and futures get crushed right now. One can not eat bitter forever.
Philosophically the problem is always about how to distribute wealth instead of how much wealth we have. I'm not saying the problem of China. I mean the problem of humankind.
Practically, just like any other real estate developer, they have tons of unfinished projects and now we don't know the future of them. And of course it's just one of the problems.
The problem is you assume they're legit. Who says they actually completed the projects (houses)? Who says there are no defects and that people can live in them? How do you even come to that conclusion? Just assume in good faith?
Imagine solving the affordable housing problem, but by doing so you create a nation scale ponzi scheme with trillions of dollars on the line because it also simultaneously made up the majority of your country's economic activity for 2 decades. That's what China is in the pickle with.
It's great they have all this housing, except there's both nobody to live in them (they were investment homes) and there's all this debt tied up in even completing the ones that were ponzied out.
They basically took the US 2008 Mortgage fiancnial crisis and said, WE CAN MAKE IT BIGGER, BY A LOT.
There are a number, and I mean a large number of issues. I'll just pick a few
1.) as of 2021, There are nearly 800 unfinished Evergrande projects in more than 200 cities across China. https://www.nytimes.com/2021/09/28/business/china-evergrande.... Even if the buildings were unfinished, the buyer still had to keep paying the mortgage!! and if they didn't, and the courts foreclosed the property and sold it, the buyer is liable for the fees and the differences. Most of the time the buyer is hugely underwater since the real estate price in 2023 has crashed 50% - 70% from peak. And now, because your social credit is shot, you no longer can purchase tickets for flight or train, making it even harder to try to find jobs to pay back your debt.
2.) China is known for its tofu dreg buildings. Just google online if you want to see brand new condos with facades blown off, cracked foundation, sand mixture where cement should be, tilted buildings, etc. This is especially true with buildings built in the last few years. And this is especially true for buildings from bankrupt mega developers like evergrande and country garden.
3.) This is a domino that leads to a series of systemic collapse. Country garden, the second largest developer in China, missed bond payments as small as 22 million recently. It had a capitalization of 60B in 2018. Now it has a debt of 200B. Zhongzhi enterprise missed payments recently, being one of the largest trust company. People are reminded of Lehman from these events. https://www.businessinsider.com/china-economy-beijing-lehman.... Doesn't help that export and import just collapsed by double digits in July, exports to US dropped 23% y/y, there's huge youth unemployment of at least 22%, foreign investment dropped 90% in 2023, and the worst flood in the last 50 years just hit China's biggest grain region.
Oh yeah, and because Chinese citizens are outraged by Fukushima release, they are boycotting Japanese seafood, and in general all seafood, which has decimated the entire seafood industry in China overnight, with no traffic to seafood market or restaurants.
4.) Even if the buildings were done, a lot of the buildings are empty and not livable due to shoddy finish, foreclosures, no public amenities working, lack of residents (owners are selling the units at 50% price cuts), etc. Imagine living in a huge 50 story building with only a few residents at night. https://www.architecturaldigest.com/story/see-inside-a-ghost...
> yeah, and because Chinese citizens are outraged by Fukushima release, they are boycotting Japanese seafood, and in general all seafood, which has decimated the entire seafood industry in China overnight, with no traffic to seafood market or restaurants.
This one is hilarious. China imports very little seafood from Japan, and they just single handedly tanked their domestic seafood industry for a few bananas worth of radiation.
Yeah many of these apartment buildings are so bad no one can move into them. They're often demolished a few years later. Construction standards just don't exist in China, and people are forced to continue paying mortgages on these properties under threat of prison. Given this extraordinary position of power and laissez-faire, the major construction companies have been way over-leveraging. Most analysts are confused as to why it has taken so long for the industry to collapse. The prevailing sentiment is that the government keeps stepping in every time another company is ready to fall. Eventually the government will just own all the construction companies directly, and the CCP has a poor investment and management track record.
Having read the article but not heard of Evergrande prior to this, what are the implications of this outside of China? The article mentions that the company filed for bankruptcy in the US, but not what US operations/developments they had.
They have $340bn of debt; even if they default on the whole amount, it's only 10% of China currency reserves.
The problem, however, is not the nominal amount but how the company network is inter-connected with other companies (either abroad or locally). This amount, albeit not colossal (by China relative size) could trigger effects in other companies that will lead to their failure. This will go on until it becomes a full international crisis.
Of course, it could mean that just some rich intercontinental people have lost money on some Chinese developer bond. The thing is, no one knows. Not the leaders of the CCP nor the US do have insights whether this can go somewhere to just stop here.
E.g. if there were a global registry of credit dependencies and ownership, at least for system relevant companies, we should know what is going to happen.
But what is the worst that could happen? If companies fold, ownership will be transferred. As long as the companies are profitable, their business will continue.
This will cause Australia's first recession in over thirty years. Chinese steel is made from Australian iron ore, which is Australia's biggest export.
At the start of the Global Financial Crisis, the Chinese government stimulated the domestic housing market, which was the start of this bubble, but the demand for steel was enough to ensure that Australia suffered no economic downturn at all.
If only hedge funds. Big pension funds, universities etc are throwing millions (billions?) of private/taxpayer money into China in recent years. A housing market collapse would not be good news for any of them...
Those were financial operations. They were selling bonds outside China.
The treatment of stakeholders have also been different inside and outside of China. The assumption based on the experience so far is that inevitably overseas investors, such as US based entities, will lose out more.
Chinese firms have been raising money in overseas markets and has been exporting risk in this way, the issue is how China's government will handle this against the opaque corporate structure behind these financial instruments sold overseas.
In theory, being a socialist utopia, everyone should just get their house because of market failure which is outside of their control. (which is kind of what I think should have happened during the GFC, bank failure in your favour so to speak)
But lets see how the utopia holds up to reality. Yay, we're living in interesting times.
In the city I'm aspiring to buy a house (a.k.a. somewhere near Tokyo), you only need to put the down payment if the construction hasn't finished yet. There will be no mortgage until after the house is ready.
I kind of think this may be a slightly better model in terms of homebuyer protection... (May not sound good for the developer though)
When a flat I‘ve bought in Germany was constructed, the payment to the developer happened „Zug-um-Zug“, that is, they received a total of like 7 payments as the development reached certain milestones.
Had to take the whole mortgage up front in one go, though.
In the USA, you obtain short term high interest financing until the home is completed, then you spin that into a mortgage. Most people buy almost completed new homes from developers, however, which means the developer takes that initial loan/risk.
Could someone key me in to this? I thought generally the Chinese government never shied away from stepping in and manipulating things. Recent trends (for example, the government blaming young people themselves for their low employment numbers) feels like they imported the bootstraps mindset from American politicians, which seems out of step with what was seen as them being rather direct in control of their economy. Recent actions from the government seem to be opposite this.
No, investors cannot just write it off as a total loss.
Hard as it may be, it will be better to just burn an entire generation rather than draw the final curtain on the People’s Republic of China and possibly the world economy as we know it.
Meh. I understand property is pretty much the only viable investment a person can make in China, but these investors should have known what they were buying. Makes me think of idiots that lost big in crypto. The bubbles value has already been spent, so someone is going to have to bag hold. Either the government should buy and forgive all the debt, or the investors should get fucked for overplaying their cards. Maybe they can fake their death or escape to another country.
If they stop paying the mortgage, the bank can foreclose on their non-built house. Frankly speaking, the government is probably going to bail all of these people out; if they don’t the whole real estate sector could fall over. The practice of selling houses yet built is not limited to Evergrande.
Why isn’t it down 100%? According to the article, they’re in bankruptcy with way more liabilities than assets. Presumably the shareholders are getting wiped out.
Bed Bath and Beyond and Sears helped me realize that the cold eyes sanity of investors is often overstated. These were both bankrupt companies who developed stockholders with cultish beliefs around the company's ongoing viability.
With Evergrande, I imagine some people believe it might be important enough for China that it may someday get a bailout. I don't believe it.
I agree with you, but it might not be completely irrational to buy an about to be bankrupt company. If the assets on book is sufficiently larger than the stock price, investors might get a payout when it gets sold off after fees. When Enron was liquidated, the last investors that bought the stock ended with an 8x RoI (according to an Acquired episode). Still an insane gamble obviously.
Same reason company executives and employees still collect a paycheck. Shareholders have the power to appoint new company executives which has some value.
As I understand from this "The Plain Bagel" video [0], they're not bankrupt. Instead, they're likely nearing the completion of their debt restructuring.
The problem is the term "bankruptcy". Colloquially people seem to think a company is just out of money. All you need to file for bankruptcy is to be unable to service debts at a specific time. It might even just be a transitory state.
Readit News
1. There is an excess supply of apartments including the ones that have already been sold. The demand side is mostly people buying second and third units as investments.
2. China is going through a weird demographic situation. The younger generations are significantly fewer in number, they will need fewer apartments to live in.
3. Chinese provincial governments raise money by developing land and continue to be incentivized to build/approve/encourage a lot of apartment units.
4. All of this is funded with mortgages.
Thing is, all four of these can not possibly be right. It’s a little too insane. Whoever is on the other side of all those mortgages should have abandoned ship a long time ago otherwise.
What am I missing?
Who is holding all that mortgage debt? Who is continuing to issue more of that debt? When do the number of people selling their investment properties exceed the number of younger generations looking to buy their first primary residence?
What you are also missing is that sometimes, parties are not allowed to abandon ship. Couples who have bought homes with mortgages but are not moved in for years are not allowed to give up, they are not allowed to stop paying on threat of imprisonment.
The organizations on the countersign are also not allowed to give up on mortgages because the existence of their company is at the will of the government.
There was an uprising where people banded together and just stopped paying their mortgages and basically threatened the local police to mass arrest them, and that's one of the things that spurred the greater bankruptcy, because the government didn't really want to arrest all the people, cause that would indicate they are not in control. And seeming to be in control is what the government will opt for every single time in every single decision they make.
That reminds me of when the Battlefield 4 game was banned in China, because one of the antagonists was a rogue Chinese general.
I remember thinking that the game would have had better odds if the plot had been about a unified and monolithic Chinese government doing willful evil instead.
Objectively, not arresting them indicates they are not in control more than arresting them would.
There are famous online videos from newlyweds that purchased a condo from a few years ago, and have been documenting their journey, and they still haven't received the unit. Meanwhile their kid was born already.
2.) Yes, just google "empty kindegardens in China". Also, marriages dropped to the lowest since records began in 1986. https://www.theguardian.com/world/2023/jun/14/marriages-in-c...
3.) Nope. China’s government land sales revenue declined for the 19th consecutive month in July. Land sales fell 10.1% from a year earlier in July, after declining 24.3% the previous month https://www.reuters.com/article/china-economy-landsales/chin...
The Chinese local governments' bonds alone total at about $2 trillion, and any defaults would rock the Asian nation's $60 trillion financial system, according to Bloomberg. https://www.businessinsider.in/stock-market/news/chinas-10-t...
Why can't all 4 of these be right? "A little too insane" defines every bubble in hindsight.
Point to a bubble w/ a collapse and I'll give you a set of statements that are "a little too insane" such that fundamentals don't hold up.
My guess is you're gobsmacked by the idea that the fundamentals don't hold up and are saying "how can anyone be that stupid?". They didn't in 99, nor 08, nor Gamestop, nor now.
Everything can be wrapped under Greed.
[Edit] Full disclosure, I'm no better - I've lost money chasing greed.
But it definitely wasn't a bubble. It was a good trade and there were some FOMO losers who kept chasing it more than they should.
On the policy side, it's very much "property taxes are the only way local government can secure revenue and so we must do whatever we can to keep the bubble inflated"
Long story short: the head of Evergrande was politically connected, helped build China on borrowed money, had no credible plan to ever repay all these loans, one day China decided to stop leveraging and Evergrande had to unwind... except it couldn't because it didn't have enough actual money to repay loans quickly. Too bad their bonds were sold to everyone and their grandmothers in China to try to find yields in the no-interest environment. Now that interest rates are back, nobody want junk Evergrande bonds anyway. Catch-22.
That's not really the issue. I doubt the younger generation can afford it. The problem is where the wealth is going - as in those with the $$$.
> The demand side is mostly people buying second and third units as investments.
No, at least not always. At some point you weren't allowed to buy more than 1 or even use your funds openly this way.
So to wrap up - those with wealth lost or have lost trust with China / the government and are withdrawing at alarming rates, e.g. to overseas. Due to how COVID was handled and many other cases where your wealth could just disappear - people now rather keep their $$$ elsewhere - not back "home".
Who’s on the other side of those mortgages? The Chinese government.
[1]: https://www.spglobal.com/marketintelligence/en/news-insights...
Since the state owned all the lands and the local governments as the sole supplier of lands, they became a monopoly in land sale. As with any monopoly especially a unchecked one they pushed to raise prices all the times to gain maximum profit. The regulation and policies of the governments aimed to build more and to keep raising the property price years after years because that's what brought in the money.
It has become unsustainable as people couldn't afford the high price. There're a glut of houses and sales have been slow yet the governments have prohibited the lowering of the price as lower housing price means lower tax revenue. There're some cases when developers lowered the price and got hit with huge fine and jailed.
High price and slow sales mean the developers like Evergrande cannot get rid of the inventory to get the capital back to fund further development. They have already sold the not-yet-built houses for the next phase but have run out of money. Couple years back the central government had forced the banks to put in severe limits on loans to the developers. They turned to shadow banks like investment fund trusts to raise money but those are blowing up just now, defaulting on bond payments. They have no money to finish the projects. They owe huge amount of debts, owe huge amount of unpaid taxes, and owe the unbuilt houses to customers. They should have been bankrupted a long time ago but the governments won't let them.
This is a huge problem for China. Housing development comprises about 25%~30% of GDP; its blowup would cripple the economy. Most ordinary people's wealth are largely tied to the value of their homes; a large drop of the house value hits most people hard, forcing them to cut back on spending, further putting down the economy. The financial institutes like banks, shadow banks, investment funds, etc have lost huge amount of money as developers unable to pay back their loans and people defaulting on their mortgages. The lowering of the property value would force more loans gone underwater. There'll be a string of bankruptcy. The local governments have large revenue shortfall and yet saddled with huge debts, because guess what, they were in the game to invest to build housing. The shortfall forces them to lay off workers, cut back on salaries, cut pensions, and cut back on services. Even the central government has no money. Last year they openly said that beyond some emergency fund there's no money left.
Any option for solutions is a bitter pill and no one has the political will to do it. It's just a downward spiral.
It's one reason China is pushing a BRICs currency. If China can print its way out of this disaster there's some hope of mitigation - messy, but not fatal.
If that doesn't happen there's a good chance of a financial and political implosion, with possible Western contagion.
Could I kindly request that you update your post with references?
This sounds very plausible, but it's difficult to acertain the veraciy of the claims.
Even if the references are anectodal, or based on your experience, it would be really helpful to know where this knolwege is coming from.
Tax-sharing system between the central and local governments in China.
- https://www.encyclopedia.com/international/applied-and-socia...
Land ownership in China.
- https://www.lehmanlaw.com/resource-centre/laws-and-regulatio...
Government's reliance on land sales over the years.
- https://www.piie.com/research/piie-charts/local-governments-...
Local governments' debts related to housing.
- https://en.wikipedia.org/wiki/Local_government_financing_veh...
- https://www.reuters.com/world/china/debt-laden-local-governm...
Limited banks' lending to developers.
- https://therealdeal.com/national/2021/01/03/china-limits-pro...
Housing price to income, one indicator among many on housing affordability.
- https://www.numbeo.com/property-investment/rankings_by_count...
Vacancy info
- https://www.hindawi.com/journals/complexity/2020/5104578/
- https://www.bloomberg.com/news/articles/2023-08-16/china-s-h...
- https://www.nber.org/system/files/working_papers/w25297/w252...
Housing glut
- https://realmoney.thestreet.com/investing/global-equity/ever...
- https://www.nytimes.com/2021/10/12/business/evergrande-homeb...
Real estate developers ran out of money.
- https://www.cnn.com/2021/12/09/investing/evergrande-default-...
- https://www.cnn.com/2021/09/24/investing/china-evergrande-gr...
- https://www.theguardian.com/world/2023/aug/18/china-property...
- https://www.cnn.com/2022/07/04/economy/chinese-developer-shi...
- https://www.cnbc.com/2021/10/18/china-property-defaults-risk...
Developer owes unpaid taxes
- https://www.gnewswire.org/en/2023/08/20/chinese-real-estate-...
Governments banning on price drop on home sales. Developers fined. (Run them through Google Translate.)
- https://www.guancha.cn/ChanJing/2021_09_19_607837_s.shtml
- https://finance.sina.com.cn/wm/2023-05-09/doc-imytcwre876472...
- https://new.qq.com/rain/a/20230507A04S7S00
Shadow banks and investment trusts defaulting
- https://www.cnn.com/2023/08/18/economy/china-zhongrong-trust...
- https://www.reuters.com/business/finance/china-trust-deficit...
Share of housing sector in GDP.
- https://scholar.harvard.edu/files/rogoff/files/the_size_of_c...
- https://scholar.harvard.edu/files/rogoff/files/nber_27697_pe...
Large household wealth tied up in home value
- https://fortune.com/2021/12/02/chinese-real-estate-investing...
Homeowners stopped paying their mortgages
- https://www.bbc.com/news/world-asia-china-62402961
- https://www.cnn.com/2022/07/14/economy/china-property-crisis...
Government running out of money.
- https://www.hindustantimes.com/world-news/chinese-premier-li...
Government cutting salaries, pension, and services.
- https://www.visiontimes.com/2022/02/02/shenzhen-civil-servan...
- https://www.republicworld.com/world-news/china/china-slashes...
- https://www.aljazeera.com/economy/2023/5/11/chinas-cash-stra...
- https://thehongkongpost.com/2022/02/01/china-asked-governmen...
- https://www.cnn.com/2023/03/31/economy/china-pension-protest...
- https://www.nytimes.com/2023/02/15/business/wuhan-china-prot...
They have several trillion in US Dollars.
Not necessarily, living space per person could increase faster.
> all funded through mortgages
All promised future work is debt by definiton. with real estate being 70% if Chinese wealth, it has to be public debt, whether in the form of mortgages or government debt.
But if I buy a slice of a high rise building, what does the deed say? What does the plat map look like? Do I just own an N% slice of the underlying land? Do I own specifically the portion of the building that is M inches from the top of the foundation to M + Q inches above it, and X inches from the Northwest corner of the structure, etc?
For rentals, it's straightforward, since the owner pre-specifies the dimensions of the unit numbers. But how does one "own" a section of a multi-tenant structure? How does one insure just their unit, if fire and other damage risk is shared?
And the very specific survey measurements are going to be based on landmarks that were likely planted for the purpose of making the survey work. Heaven help you if you have seismic activity move anything around.
That is, all of this only works because we define it to do so. You can do the same with a high rise. Condos are very common and have well defined common areas and housing spaces. Things get more complicated when you consider time share ownership.
I know plenty of people in the US who own condos (usually part of a pair e.g. 1A/1B), but outside of major cities the idea of owning an "apartment" (a unit in a huge building full of hundreds of other units) is somewhat foreign. However, my relatives in eastern Europe own these types of apartments as their primary investment vehicle due to poorly performing native currency / stocks.
----
via ChatGPT:
"The ownership of an apartment or condominium within a multi-unit building is indeed different from owning a single-family home. Here's how it typically works:
### Deed and Plat Map
1. *Deed*: The deed for a condominium or apartment within a high-rise will usually refer to a "unit" as defined in a "master deed" or "declaration" that has been recorded for the condominium. It will contain a description of the unit and any associated "common elements" that you may have an ownership interest in (e.g., shared hallways, gardens, and sometimes amenities like a gym or pool).
2. *Plat Map*: This would typically include a map of the entire complex, including the boundaries and location of each individual unit, along with common areas. These maps are often extremely detailed and have to be filed with a local government office.
### Ownership Structure
1. *Air Space*: In essence, you own the "air space" confined by the boundary walls of your unit, sometimes specified down to the paint on the walls. The structural elements, building exterior, and common areas are usually considered "common elements" owned collectively by all unit owners.
2. *Percentage Ownership*: Yes, you often own a percentage of the common elements, including the land upon which the building is constructed. This is sometimes proportional to the size of your unit as a percentage of the total building or complex size.
### Insurance and Liability
1. *Individual Insurance*: You would typically have a specialized form of homeowner's insurance known as an HO-6 policy that covers the internal elements of your unit (fixtures, improvements, personal property, etc.) and may provide liability coverage for incidents within your unit.
2. *Master Insurance*: The homeowners' association (HOA) will generally have a "master" insurance policy covering damage to the common elements and the overall structure. This is funded by HOA fees collected from the unit owners.
3. *Shared Risk*: The risk is essentially communal, but individual unit owners are usually responsible for the deductible on the master policy for damages originating in their units. Some complex scenarios could involve subrogation between the individual and master policies.
Understanding your specific rights and responsibilities when purchasing a unit in a multi-unit structure is crucial, and legal counsel is usually advised to navigate the complexities. Always read the declaration, by-laws, and any rules and regulations to understand your ownership fully."
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they did. they moved a ton of cash into BTC, houses in Vancouver, or African mining holdings, and GTFO.
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Personal anecdote. I had a mortgage for 2 full years before being able to move in to my apartment because I bought it before a single stone was laid. The way this works here is that the money is held into an escrow account for most of time, with the construction company only receiving payments in installments (e.g. 'roof finished'). Lastly, the final 5% of the purchase amount is held back until 3 months after the unit is finished, which can be extended if large defects are found. Bankruptcy risk was covered with an insurance, which was a condition to the mortgage.
The other model, where investors fund development before the house is sold, aligns both parties. The developer/investor wants to produce a good product so that it will sell at a high price and the buyer has the chance to inspect the property before purchasing.
And they have excess debts that their assets no longer cover because the housing market crashed.
Additionally, they just took on obscene debts. The banks did not do the appropriate due diligence (hypothesis is the local governments interfered).
But I know only what rando YouTube videos have told me.
Basically the same corruption that societies have been battling ever since societies existed.
Their physically ability to deliver homes is not what's at stake here.
https://www.reuters.com/world/china/unfinished-evergrande-ap...
No, they are demolishing whole empty cities to keep the prices up.
https://asia.nikkei.com/Spotlight/The-age-of-Great-China/Con...
https://www.youtube.com/watch?v=8AuWH2GdH1w
The article talks about buildings in kunming being demolished. While kunming definitely went through a big bubble, I would hardly call it a ghost town now.
Practically, just like any other real estate developer, they have tons of unfinished projects and now we don't know the future of them. And of course it's just one of the problems.
The problem is you assume they're legit. Who says they actually completed the projects (houses)? Who says there are no defects and that people can live in them? How do you even come to that conclusion? Just assume in good faith?
It's great they have all this housing, except there's both nobody to live in them (they were investment homes) and there's all this debt tied up in even completing the ones that were ponzied out.
They basically took the US 2008 Mortgage fiancnial crisis and said, WE CAN MAKE IT BIGGER, BY A LOT.
1.) as of 2021, There are nearly 800 unfinished Evergrande projects in more than 200 cities across China. https://www.nytimes.com/2021/09/28/business/china-evergrande.... Even if the buildings were unfinished, the buyer still had to keep paying the mortgage!! and if they didn't, and the courts foreclosed the property and sold it, the buyer is liable for the fees and the differences. Most of the time the buyer is hugely underwater since the real estate price in 2023 has crashed 50% - 70% from peak. And now, because your social credit is shot, you no longer can purchase tickets for flight or train, making it even harder to try to find jobs to pay back your debt.
2.) China is known for its tofu dreg buildings. Just google online if you want to see brand new condos with facades blown off, cracked foundation, sand mixture where cement should be, tilted buildings, etc. This is especially true with buildings built in the last few years. And this is especially true for buildings from bankrupt mega developers like evergrande and country garden.
3.) This is a domino that leads to a series of systemic collapse. Country garden, the second largest developer in China, missed bond payments as small as 22 million recently. It had a capitalization of 60B in 2018. Now it has a debt of 200B. Zhongzhi enterprise missed payments recently, being one of the largest trust company. People are reminded of Lehman from these events. https://www.businessinsider.com/china-economy-beijing-lehman.... Doesn't help that export and import just collapsed by double digits in July, exports to US dropped 23% y/y, there's huge youth unemployment of at least 22%, foreign investment dropped 90% in 2023, and the worst flood in the last 50 years just hit China's biggest grain region.
Oh yeah, and because Chinese citizens are outraged by Fukushima release, they are boycotting Japanese seafood, and in general all seafood, which has decimated the entire seafood industry in China overnight, with no traffic to seafood market or restaurants.
4.) Even if the buildings were done, a lot of the buildings are empty and not livable due to shoddy finish, foreclosures, no public amenities working, lack of residents (owners are selling the units at 50% price cuts), etc. Imagine living in a huge 50 story building with only a few residents at night. https://www.architecturaldigest.com/story/see-inside-a-ghost...
This one is hilarious. China imports very little seafood from Japan, and they just single handedly tanked their domestic seafood industry for a few bananas worth of radiation.
I read "deplorable construction standards in some of these tree houses. "
I was about to question your statement...
The problem, however, is not the nominal amount but how the company network is inter-connected with other companies (either abroad or locally). This amount, albeit not colossal (by China relative size) could trigger effects in other companies that will lead to their failure. This will go on until it becomes a full international crisis.
Of course, it could mean that just some rich intercontinental people have lost money on some Chinese developer bond. The thing is, no one knows. Not the leaders of the CCP nor the US do have insights whether this can go somewhere to just stop here.
E.g. if there were a global registry of credit dependencies and ownership, at least for system relevant companies, we should know what is going to happen.
But what is the worst that could happen? If companies fold, ownership will be transferred. As long as the companies are profitable, their business will continue.
At the start of the Global Financial Crisis, the Chinese government stimulated the domestic housing market, which was the start of this bubble, but the demand for steel was enough to ensure that Australia suffered no economic downturn at all.
All that's about to come crashing down.
https://commons.wikimedia.org/wiki/File:Australia_Product_Ex...
The treatment of stakeholders have also been different inside and outside of China. The assumption based on the experience so far is that inevitably overseas investors, such as US based entities, will lose out more. Chinese firms have been raising money in overseas markets and has been exporting risk in this way, the issue is how China's government will handle this against the opaque corporate structure behind these financial instruments sold overseas.
[1] https://www.reuters.com/world/china/chinas-mortgage-boycott-...
But lets see how the utopia holds up to reality. Yay, we're living in interesting times.
I kind of think this may be a slightly better model in terms of homebuyer protection... (May not sound good for the developer though)
Had to take the whole mortgage up front in one go, though.
Making people pay could collapse the entire economy.
Ahh yes, the ol' "privatise the profits, socialise the losses" approach to big finance failures.
Hard as it may be, it will be better to just burn an entire generation rather than draw the final curtain on the People’s Republic of China and possibly the world economy as we know it.
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It's not going to make people feel positive about their mortgages
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With Evergrande, I imagine some people believe it might be important enough for China that it may someday get a bailout. I don't believe it.
[0] https://www.youtube.com/watch?v=c-n6RN8a2Zo
[0] https://news.ycombinator.com/item?id=29508238
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