China debt?

[MBE2017]

Is China about to experience what the West went through in 2008? Worrying signals coming through, huge increases in debt bonds not being replayed, both by private and more worryingly State backed companies.

Latest estimates are 4 trillion dollars of Local Gov “off the book” debt, coupled with several notable huge real estate failures, massive increases year on year of bond payment failures, all seems depressingly like 2008 over again. With China such an economic superpower today, this could have massive repercussions tipping the world into another recession.

 

[Ozzy]

I was just reading about this earlier. With the huge growth China has seen in the recent years all off the back of outsourcing and cheaper labour/supply chain, it's heavily influence by changes in any of those from anywhere else in the world. It's very easy for anyone to switch supply to any other BRIC or even bring local, ala #brexit. Their development is based on the past booms of businesses around the world outsourcing everything to cheap China, and that isn't sustainable as anyone can come along and undercut. Then when supply chains break down they are in a right mess.
Unlike Dubai which is financed off the back of huge oil reserves it controls and distributes.

I'm not surprised, but the fall out will be sizeable and we are overdue a major recession to rebalance the books.

 

[The Byre]

China may implode! Britain, China and the US all have wildly inflated house prices thanks to cheap money. China, in particular, has an economy that is deeply dependent on property speculation, as we have seen from the Evergrande debacle.

Economist Steve Hanke says that about 10% inflation is already "baked into the system" in the US and that there is nothing the Fed can hope to do to avoid it. Fellow economist David Hunter claims that the world is heading into "the worst financial crisis in history" and that there will be a massive correction in the wildly speculative stock market and other equity valuations.

The economics department at the Deutsche Bank has been warning about worldwide debt levels for over a year. Everyone is shouting alarm - yet central banks everywhere are still printing money and buying company assets. bonds in particular. The Fed is doing so with no real sign of slowing down and Biden wants to spend about $4 trillion on infrastructure projects - except that present asset purchases by the Fed are over-heating the bond market already.

The FT reported that UK money markets expect inflation, as measured by the Retail Price Index, will hit 7% by next April. The media foolishly just looks at the irrelevant CPI, but in the UK, the RPI is used to determine rail fares, interest on student loans, the coupon on inflation-linked Government debt and a wide range of similarly linked government contracts.

The UK government has already defaulted on the so-called 'Tripple-Lock', so we can expect it to not be able to honour other obligations as well.

Then there is the stock market - No one knows how much total leverage there is in the stock market as only fragments are reported. Margin loans are reported monthly and they can provide a general idea of the trend in stock market leverage, but many types of leverage are not disclosed at all until something implodes spectacularly.

Leverage pumps up stock prices by creating buying pressure as borrowed money surges into the market; and when the market tanks, forced selling by leveraged investors creates selling pressure and amplifies the sell-off and triggers its own downward spiral. And when that happens, good assets get sold off to cover bogus positions in bad assets.

Just remember that the CDO crisis started in January 2007, long before anyone woke up to the fact that CDOs were not selling as they once did. It was September before the investment banks began to panic and 2008 before the media caught the first wind of banks being in trouble. Then dominos began to fall in all directions!

This time the stakes are far, far higher! The dominos stretch deep into every country on Planet Earth. Just don't get caught living in a city or town when the balloon goes up!

 

[The Byre]

Latest estimates are 4 trillion dollars of Local Gov “off the book” debt, coupled with several notable huge real estate failures, massive increases year on year of bond payment failures, all seems depressingly like 2008 over again.

$4tn is an old figure from 2018 - it will be far higher now.

That was $4 trillion hidden government debt that was kept off the books.

Here are some more funky figures for Chinese debt -

• 2021 Q1 and Q2 company defaults were $18bn. Of that, $11bn was from government-owned and run businesses.
• Debt was 270% of GDP in 2019.
• After Evergrande defaulted, three more property developers defaulted - total damage $678m.
• Bonds from companies rated AA+ now have an 82% default rate!

 

[thetiger2015]

This is all going to be worse than 2008. That was a limited shock, through a particular sector that impacted others. This is a catastrophic failure of debt management worldwide. Countries are built on debt. The USA is financially ruined, China is battling, the EU is in debt, the UK is in debt. All fine, if you can afford to repay the interest...most cannot.

More concerning perhaps, what's a good distraction from national debt?....war?

I don't think we've ever been closer to something horrific happening. The selection of world leaders we have right now are really not compatible with fixing these issues and China is emboldened by the fact the US has gone to sleep on the world stage.

 

[Deleted member 59730]

Unlike Dubai which is financed off the back of huge oil reserves it controls and distributes.

Really? I thought Dubai had relatively little oil reserves.

Dubai has serious debt problems to Abu Dhabi and the UK. Some of their major projects will never make a profit. Some of their hotels at current earnings will take 500 years to pay back the loans. I've stood on an architect's balcony surveying the night scene from his apartment. There was a great big hole of several blocks in darkness. Newish apartment blocks were empty and would never repay their debts.

Dubai is financed by little more than the idea behind the Kevin Costner film "Field of Dreams." Build it and they will come.

 

[WaveJumper]

I was just reading about this earlier. With the huge growth China has seen in the recent years all off the back of outsourcing and cheaper labour/supply chain, it's heavily influence by changes in any of those from anywhere else in the world. It's very easy for anyone to switch supply to any other BRIC or even bring local, ala #brexit. Their development is based on the past booms of businesses around the world outsourcing everything to cheap China, and that isn't sustainable as anyone can come along and undercut. Then when supply chains break down they are in a right mess.
Unlike Dubai which is financed off the back of huge oil reserves it controls and distributes.

I'm not surprised, but the fall out will be sizeable and we are overdue a major recession to rebalance the books.

Something else to throw into the mix which is playing on traders minds at the moment is yet again Asian markets have suffered steep losses overnight, with Japanese and Hong Kong indices bearing the brunt of that downside. This all comes in the wake of another 13% decline in Evergrande (Chinese real estate company) after the firm announced that their $2.6 billion deal to sell their property services business to Hopson Development had fallen through. A lot of eyes are focussed on this at the moment and has defiantly spooked the markets over the last few weeks, another real big problem for the Chinese.

 

[IanSuth]

Genuine question here

Am i right in thinking a lot of the developing world, the areas heralded as the next big market/powerhouse have developed based upon cheap loans/assistance from China.

Does anyone know how the growing Chinese debt issues may affect the work going on in these growing markets and what the fall out might be ?

 

[thetiger2015]

Genuine question here

Am i right in thinking a lot of the developing world, the areas heralded as the next big market/powerhouse have developed based upon cheap loans/assistance from China.

Does anyone know how the growing Chinese debt issues may affect the work going on in these growing markets and what the fall out might be ?

The Chinese have been acquiring land and resources by offering loans at amazing rates for various projects.

Belt and Road is the most recognised project: https://en.wikipedia.org/wiki/Belt_and_Road_Initiative

Investment in over 70 countries and possibly links to the rebuilding of Afghanistan, possibly why the US left in a hurry. They were told to get out because China's coming and has big plans for that region. Something the US has failed to plan for, instead, spending billions on fighting people on hilltops, rather than building houses and infrastructure.

The concern is, if China cannot use money to acquire land/assets overseas, what will they do instead? They're now investing tens of billions in weapons technology...is that plan b? If the money runs dry, will they switch tactic and take advantage of the west being absolutely pathetic with defence budgets and procurement?

The US is slowly starting to realise that it's not Russia that is a risk here, it's the Chinese (both financially and militarily). Too late I think.

 

[fisicx]

China has been assisting countries around the world for years. Mainly infrastructure project in exchange for resources or just access to internal markets. They own or control huge parts of the globe.

Look at Huawai and how they got into every part of the internet without anyone noticing.

 

[japancool]

China has been assisting countries around the world for years. Mainly infrastructure project in exchange for resources or just access to internal markets. They own or control huge parts of the globe.

Look at Huawai and how they got into every part of the internet without anyone noticing.

One wonders why the West doesn't do that.

Oh right. Because we insist on "human rights" and start getting snooty when it doesn't happen.

 

[thetiger2015]

One wonders why the West doesn't do that.

Oh right. Because we insist on "human rights" and start getting snooty when it doesn't happen.

Those in the far east are much more intelligent than our lot. They worked out decades ago that they could buy influence in the west by selling us shiny object at cheap prices. We're a consumer driven part of the planet and places like China have taken advantage of our desire to 'own lots of little things'.

Meanwhile, our politicians have persisted with this line of 'service industry good, manufacturing industry bad' - they like pretty people in suits. They don't like people in overalls with oil on their face.

This means we now buy all of our stuff from the far east, because they do all the mucky stuff and use the so called 'low skilled' workers to make phones for us, the wealthy westerners.

Human rights - it's less of an issue for people if it happens thousands of miles away. Look at the Newcastle United take over. People don't care. Like they don't care that a phone is made by someone earning less than £5 a day. Not interested. They don't want to see it. They just want the phone they ordered online.

Politicians have as much to answer for this as the ordinary man on the street. They've perpetuated the stereotype of 'low skilled' workers being lesser humans. They've not invested in industry, they've let shipbuilding go, they let manufacturing go...and now, we are here. Reliant on overseas superpowers to be nice to us and continue selling us shiny objects at affordable prices.

 

[The Byre]

Evergrande magicked-up some money and paid the interest coupons on their debt at the very, very last minute. We can safely assume that the government-owned banks engineered a solution and created some money.

 

[MOIC]

China (and Chinese) look after themselves only.

They manipulate situations to suit their requirements.

They own, or have significant interests in major ports throughout the world as well as ‘owning’ much of Africa and now moving to South America. Don’t rule out Europe, starting with Poland and Hungary.

They plan their future in 50 year cycles, not like Lenin’s 5 year plans or the West’s yearly agendas.

How many of you played RISK?

You’ll know how it works.

Beware.

 

[The Byre]

I have no problem with that - they are behaving rationally. It is the West that is behaving irrationally!

 

[The Byre]

Goldman-Sachs has reported yesterday that Chinese local governments owe $8.2 trillion. That is 52% of GDP. Japanese investment funds are now excluding Chinese government bonds.

At the same time, the new Atlanta Federal Reserve Bank's 'GDP-Now' online measure of the US economy has GDP growth at just above zero. The official CPI figure for the US is now 5.4% and Proctor & Gamble say that their costs are increasing at over 13%. Gasoline is now $7.50 a gallon in some states - that's £1.50 a liter.

The two largest economies on Planet Earth are driving off a cliff of stagflation.

 

[WaveJumper]

Breaking news this morning Evergrande has defaulted for the first time on its dollar debt

 

[Mark T Jones]

I recall an article which described China's economy as 'a freight train going up a hill'. meaning that it can't slow down because the second it does all the impetus will be gone and it will slide.

50 year vision is great in principle, but in reality you have to keep a keen eye on the immediate future to have a long term future.

 

[WaveJumper]

I recall an article which described China's economy as 'a freight train going up a hill'. meaning that it can't slow down because the second it does all the impetus will be gone and it will slide.

50 year vision is great in principle, but in reality you have to keep a keen eye on the immediate future to have a long term future.

And that about sums it up quite nicely. There was a very mixed affair overnight as stocks in Hong Kong and China gained over 1%, although Japanese and Australian markets traded in the red. On the data-front, Chinese inflation data saw CPI on the rise and PPI head lower a lot of the Evergrande will have all ready been built into the markets but its going to be interesting if we see it knock the US market this afternoon which so far been having quite a good week.

 

[MOIC]

Breaking news this morning Evergrande has defaulted for the first time on its dollar debt

One of many companies in China to do so. The property market in China is vastly overvalued and hopefully this will trigger a correction.

What affect this will have on global markets is anybody's guess, but certainly does not look good.

Let's see what the next few weeks bring.

 

[Financial-Modeller]

Of the bondholders that are not receiving coupon payments; does anybody know the split between domestic and external source of funds?

Or put another way, are the bondholders from China or the West?

 

[WaveJumper]

Firms That Publicly Disclosed Holdings​

FIRM	TYPE OF HOLDINGS	SIZE OF HOLDINGS	MOST RECENT DISCLOSURES:
Ashmore Group	USD Bonds	$433 million	06/30/21
BlackRock	USD and HKD Bonds	$397 million	09/22/21
UBS Group	USD Bonds	$275 million	07/31/21
HSBC Holdings	USD Bonds	$207 million	07/31/21
Royal Bank of Canada	USD and HKD Bonds	$118 million	06/30/21

 

[The Byre]

Giant companies like Ashmore Group, BlackRock Inc., FIL Ltd., UBS Group AG and Allianz SE have all reported holding Evergrande debt. This is just the overture!

 

[Financial-Modeller]

A cynic might suggest that its not doing China much harm if Chinese Real Estate Developers borrowed money from western investment funds, then spent it and are now defauting on repayments.

It would be quite different if the source of funds was Chinese pensions.

 

[WaveJumper]

The rest of the world will defiantly feel the pain but there are also a lot of private individual investors in China, plus the people & companies who have paid deposits on property not yet built and of course the builders, supply chain etc who are going to be left wondering what the hell happened. I believe there has been a lot of protesting on the streets. And as mentioned before this is just of tip of the iceberg of Chinese property companies in distress.

 

[Deleted member 59730]

China seems to be suffering from the opposite problem to the UK. Here we cannot build enough houses while the Chinese built too many.

 

[MBE2017]

China seems to be suffering from the opposite problem to the UK. Here we cannot build enough houses while the Chinese built too many.

Many ghost cities, tens of thousands of never used apartments, all built for property speculators, who simply sell their investment on, except the buyers have now disappeared. I think this China led recession will be the largest ever.

It’s a sobering thought that the Chinese property market is larger than the US, and most of Europe combined. The only people left to buy these ghost apartments are the Chinese themselves, at multiples of 50x their average salaries.

2022 is looking dire IMO, and the whole world is going to catch this one full in the face.

 

[MOIC]

Whilst I agree with much of @MBE2017 post above there are marked differences with what's happening in China vis-a-vis the west.

There's a policy started 20 years ago for getting the population living in villages to living in apartments in new towns, as part of the alleviating the poverty situation, hence the building programs. They were heavily subsidised by Beijing. During the past few years this has become increasingly hard to get families to move from their villages, as the vast majority of the children migrate to the other cities and provinces for employment. The parents are very reluctant to move from their current homes, which they have been used to all their lives and do not see moving into a new apartment(with low or no rent) as a draw. The Chinese psyche is different.

I would also add that many of the youngsters in China are eager to own their own businesses and this they do with great aplomb. They start their business with nothing and within 3-5 years they reach a level where they start to invest in property. Many I know and who used to work with me, own several apartments, without a mortgage. They can afford to sit on them, knowing that it's a long term investment.

Their wealth is on a different level to youngsters their age in the west.

However . . . . .there needs to be a correction in property values to allow the 'working population' to be able to rent and buy homes they can afford.

2022 is looking dire IMO, and the whole world is going to catch this one full in the face.

I agree!

 

[WaveJumper]

Whilst I agree with much of @MBE2017 post above there are marked differences with what's happening in China vis-a-vis the west.

There's a policy started 20 years ago for getting the population living in villages to living in apartments in new towns, as part of the alleviating the poverty situation, hence the building programs. They were heavily subsidised by Beijing. During the past few years this has become increasingly hard to get families to move from their villages, as the vast majority of the children migrate to the other cities and provinces for employment. The parents are very reluctant to move from their current homes, which they have been used to all their lives and do not see moving into a new apartment(with low or no rent) as a draw. The Chinese psyche is different.

I would also add that many of the youngsters in China are eager to own their own businesses and this they do with great aplomb. They start their business with nothing and within 3-5 years they reach a level where they start to invest in property. Many I know and who used to work with me, own several apartments, without a mortgage. They can afford to sit on them, knowing that it's a long term investment.

Their wealth is on a different level to youngsters their age in the west.

However . . . . .there needs to be a correction in property values to allow the 'working population' to be able to rent and buy homes they can afford.


I agree!

A good insight @MyOfficeInChina

 

[Chris Ashdown]

I don't see the Estates as the major problem facing China, but the fact that the leaders are trying to bring back some control measures under we know best sort of government.

It has frightened off many of the high tech foreign companies to find other areas to work in or even return to their home countries. Visions of global supremacy have been hit and hence the lets build up our armed forces to show our might, just like many other countries before them, hence the claims for the south china sea areas and threats to countries next door

Just like Russia and a few other places that have undemocratic governments, they know that holding back democracy is only a matter of time before the people rebel, censorship cannot continue to work in the modern world; and maybe the women of the countries will be the leading force in the fight as equal rights is a exceedingly strong fighting force

 

[MBE2017]

Well, sometimes things take time to develop.

Evergrande have filed for bankruptcy protection in the USA, the China property bubble is beginning to pop. I first mentioned them October 2021, this is as big a moment as Lehman Bros back in 2008 for the USA, possibly bigger.

 

[thetiger2015]

Well, sometimes things take time to develop.

Evergrande have filed for bankruptcy protection in the USA, the China property bubble is beginning to pop. I first mentioned them October 2021, this is as big a moment as Lehman Bros back in 2008 for the USA, possibly bigger.

In the meantime though, China have been involving themselves in other industries quite heavily, to diversify their portfolio.

They've massively increased wind turbine manufacturing and export: https://www.usitc.gov/publications/...d_turbine_export_growth_continued_in_2021.pdf 2.9 to 7 billion in under 5 years.

Interestingly, China is now competing with European manufacturers on eco energy projects. They're much cheaper, they export more quickly and they're not governed by so much red tape. They can bring eco-friendly products to market really quickly, unlike the UK, which still pretends it has a place in the world...it doesn't...we are irrelevant and China has vastly more people employed in low-carbon projects than we do - https://www.worldbank.org/en/news/p...ce-needs-shifts-in-resources-and-technologies

So, they've realised that the property markets are unsustainable and fluctuate too much. Billions is being pushed in to other projects, to offset any damage caused by property market collapses.

They're also heavily investing in African infrastructure projects. I find it fascinating. They're so much more agile than the UK. We have almost zero influence in Africa, we haven't helped them with technology, we don't invest in their countries, we just moan about them. China? Nope. They invest, they bring technology, they bring roads, they bring raw materials. They're buying influence and acquiring land all over the world, without the need for war. It's very simple but clearly, beyond the understanding of our Oxford educated overlords.