China's Evergrande Real Estate Empire to be Dismantled

$300 Billion in debt goes to cents on the dollar. Investors were hoping for a US-style Wall Street bailout that preserves banker bonuses – China don’t do that.

https://www.nytimes.com/2024/01/28/business/china-evergrande.html

intercst

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The big losers will be millions of little guys, who “bought” their apartments before they were built, and who now hold the deed to something that doesn’t exist, or if the basic infrastructure got to the point of completion, can’t be finished or occupied without the addition of another lifetime’s wages.

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I wonder if that will really happen or if the government will simply overrule the Hong Kong court and make the company stay alive with some sort of esoteric roundabout method of new financing?

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Whether or not Chinese leaders fully understand it or not, this meltdown has profound impacts on China’s tactical options in responding to a a whole host of events over the next 3-5 years.

As one commenter put it, how corrupt must the system be for the developer to be out of money and unable to service its debts when real estate market logistics are such in China that nearly every unit under construction was paid for 100% in advance? Many of these units weren’t bought to live in, they were purchased as 2020s Chinese equivalents of tulip bulbs or Enron stock shares. As such, many “buyers” weren’t initially concerned the units weren’t ready for move-in on any reasonable schedule, the “buyer” was already enjoying the appreciation in paper prices. That gave the entire bubble another 12-18 months to spiral … Until reality set in.

The amount here is staggering – $300 billion US dollars equivalent. But the larger story is this isn’t just one company, Evergrande. That parent operates over one thousand shell companies throughout China. American economic history since the 1880s makes it clear no one operates MORE companies for efficiency. You operate FEWER, BIGGER companies for efficiency. If you are CHOOSING to operate MORE companies – again, not just DOZENS but over ONE THOUSAND – you are doing so to obfuscate reality from investors, regulators or powerful government forces. Or possibly doing so to provide more opportunities to grease the palms of local politicians and business owners.

At this point, these two alternatives are equally likely:

a) The Chinese government is working with all its might to prevent far worse numbers it thinks it has in its possession from leaking out.

b) Those “worse numbers” in the Chinese government’s possions are in fact meaningless because leadership has not yet learned the value of proper financial accounting, indepenent audits and separation between government policy making and private management. Accurate bad numbers are simply not available because the system doesn’t collect them.

Chinese leaders have much to consider here. Filling this $300 billion dollar equivalent hole – or at least attempting to fill it partially to defer a larger reckoning – is going to absorb a lot of money that would otherwise be required for some of China’s other possible adventures… Invading Taiwan, continuing to throw money at foreign governments to support ports and infrastructure projects as a means of buying political leverage against the US, etc. If China continues to turn a blind eye to Putin’s efforts in Ukraine or events in the middle east, a larger war in Europe and / or the middle east would tank the world economy and shipping and paralyze China completely.

Not that the US would fare much better but at least SOME players in the American economy have some understanding of the dangers created by the peculiar flavor of Communist capitalism the Chinese thought they perfected. It’s not clear Chinese leaders do, even after these giant tremors should be hinting at the catastrophe to come.

WTH

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The Chinese have to let it all sink. It reduces the potential for inflation. The de facto peg to the dollar at this point would be absolutely a ruinous hell of inflation without this recession into hell. China is a lost cause.

While $300 BILLION is indeed a lot, keep in mind that next week the US Treasury will auction/sell more than $300B, probably even more than $400B, of treasury debt (bills/notes/bonds). In ONE week!

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