Posts Tagged ‘default’

Could China’s House of Cards Finally Collapse?

Thursday, September 23rd, 2021

I’ve been writing about China’s bubble economy for over a decade, from the housing bubble to the Ghost Cities and even ghost collateral. And now China’s entire house of cards appears to be trembling thanks to a company called Evergrande, which owes more than $300 billion.

China Evergrande Group, until recently the world’s largest property developer, owns dozens of stalled sites like Sunny Peninsula across China. Buckling under more than $300 billion in liabilities, the company is close to collapse, leaving 1.5 million buyers waiting for finished homes.

That’s $300 billion, with a B. It’s hard to imagine that an American company would ever be allowed to accumulate that much debt (though AT&T is evidently carrying a hefty $167.9 billion debt load).

That’s why Evergrande has reached its Lehman moment:

Instead of Evergrande making the announcement, it was the entity that will soon control the massively overlevered property developer that made it for them: the Chinese government.

According to Bloomberg, Chinese authorities told major lenders to China Evergrande Group not to expect interest payments due next week on bank loans, which takes the cash-strapped developer a step closer the nation’s largest modern-day restructurings, and guarantees that China’s “Lehman Moment” is now just a matter of days, if not hours.

According to Bloomberg, citing unnamed sources, the Ministry of Housing and Urban-Rural Development told banks in a meeting this week that Evergrande won’t be able to pay its debt obligations due on Sept. 20, and instead most of Evergrande’s working capital in now being used to resume construction on existing projects, the housing ministry told bankers, according to a Bloomberg source.

And since nonpayment of interest and principal will represent an event of default, the company is unlikely to make any subsequent interest, or principal, payments either since it will have already default even though Bloomberg claims that “Evergrande is still discussing the possibility of getting extensions and rolling over some loans.” It won’t, especially since the developer will also miss a principal payment on at least one loan next week, which means it’s game over.

Meanwhile, as reported previously, Chinese authorities are already laying the groundwork for a debt restructuring of the $300 billion company (which recently hired Houlhan Lokey to advise it during the upcoming historic bankruptcy), assembling accounting and legal experts to examine the finances of the group. With senior leaders in Beijing silent on whether they will allow Evergrande creditors to suffer major losses, bondholders have priced in slim odds of a rescue infuriating countless investors and creditors who have mobbed the company’s offices across the country and also gathered at its HQ, demanding the company “return their money.” It won’t happen.

Not only is Evergrande possibly facing complete liquidation, but word came down that the company might make payments on Chinese-owned debt, but stiff foreign debt holders.

But the word this morning is that the Chinese government is now telling them to avoid default on dollar-denominated bonds. After all, if investors worldwide decided that all Chinese debt was potentially toxic, that would leave connected Chinese communists in a world of hurt.

And we can’t have that.

The unusual thing about Evergrande is that they owe money to everyone:

It seems to me that what is interesting about Evergrande is not so much the magnitude of its debt problems but their variety. Evergrande owes money to Chinese banks. It owes money to foreign hedge funds, and foreign investors own its stock. It owes money to suppliers, and to Chinese retail investors in those wealth management products. And it owes apartments to buyers. And the retail investors who bought Evergrande wealth management products were often also Evergrande homeowners, because the products were sold at Evergrande buildings.

It even took out short-term loans from its own employees. Also, it’s evidently stopped paying some employees. I don’t know about you, but for me both those would be signs it was time to look for another job.

More:

When a big company runs out of money, the basic questions are (1) who gets paid and who doesn’t and (2) should the government pay its debts for it? Those questions are interconnected. There is an ordinary way to answer the first question, some waterfall of claim seniority. You look at the company’s capital structure and say “well these people have senior claims and will get paid back, and these people have junior claims and won’t, and these other people are somewhere in the middle and might get some recovery.” And there are complex and subtle questions about the best way to preserve value in the business: Perhaps you have the legal right to stiff customers (perhaps their deposits aren’t particularly senior claims), but if you do that you’ll never get any more customers, so you treat them better than you are legally required to. And the managers of the business and the creditors and the lawyers work together to figure out a plan that maximizes the recovery for everyone.

But if the ordinary process to answer the first question ends up with an answer like “sympathetic ordinary people lose their life savings,” or “politically connected people lose everything,” or “the banking system loses a lot of money and becomes undercapitalized,” or for that matter “housing prices collapse,” then that is a good reason for the government to step in. And if the government is stepping in, there is no particular reason to assume that the ordinary claims of seniority will apply. If the government steps in to rescue small investors or the banking system or housing prices, that doesn’t necessarily mean it will also rescue foreign hedge funds.

Bloomberg’s Joe Weisenthal and Tracy Alloway did an Odd Lots episode with analyst Travis Lundy about this, in which he gives his best guess at a waterfall of repayment. “I think that if you start from the ranking of who ends up coming out well on this, if you had to ask, this is the Communist Party of China who’s the most important stakeholder in this,” he says, and then goes through a list of claimants ordered by, basically, how politically sympathetic they are. This seems like a more reasonable analysis than, like, looking at the corporate structure and legal document to see which claims are more senior.

After the subprime meltdown in 2008, steps were taken to reduce systemic risk in the American and European economies. China? Not so much.

Whatever the ultimately resolution of Evergrande, the Chinese real estate market still seems both way over-leveraged and horribly opaque.

That leads to things like 15 abandoned, never completed Chinese skyscrapers being demolished:

That wasn’t Evergrande, but a dizzying succession of other firms:

The original developer was Kunming Xishan Land and Housing Development and Operation (Group) Co., Ltd. (hereinafter referred to as Kunming Xifang). The project covers an area of ​​about 340 acres. It is planned to have residential, commercial and office buildings. It is divided into 4 plots for development and construction, namely A1, A2, A3, and A4. Among them, the A1 and A3 plots are commercial, and the A2 and A4 plots are residential, with a total construction area of ​​approximately 630,000 square meters. Among them, the delivery of four high-rise residential buildings on the A2 plot has been completed, with a construction area of ​​about 136,000 square meters.

In 2012, due to the break of Kunming Xifang’s capital chain, the project was taken over by Yunnan Tin Industry Real Estate Development and Management Co., Ltd. (hereinafter referred to as Yunxi Real Estate). The project was renamed Yunxi·Gemdale. In July 2013, due to various reasons, Yunxi Construction of Sikkim Land was suspended. 2014 was originally the delivery time for the A2 plot of Yunxi Jindi, but due to the suspension of the project, the delivery did not begin until March 2015. In addition to the 4 high-rise buildings in the A2 plot that have been delivered, the remaining three plots A1\A3\A4 totaling 15 high-rise buildings have been suspended since the end of 2013.

In order to solve the problems left over from the unfinished project, the government restarted the project through the listing and transfer of the Yunnan Provincial Property Rights Exchange. On December 29, 2020, Yunnan Honghe Real Estate Co., Ltd. obtained the right to develop the project through equity transfer.

According to Sun Zheng, general manager of Xifang Group’s Liyang Star City Phase II Project, on January 6 this year, Yunnan Honghe Real Estate Co., Ltd. acquired 100% of Kunming Xifang’s equity and 23,068,600 yuan of debt at a transfer price of 979 million yuan. At present, West Real Estate is a wholly-owned subsidiary of Honghe Land. In order to maintain the continuity of project development, Liyang Star City Phase II will continue to use West Real Estate as the main development entity.

Got all that? That’s just one development in one city you’ve never heard of. How many other ghost developments are there in China? Hundreds? Thousands?

Another real estate boondoggle: Why Shanghai Tower failed. “The Shanghai Tower is owned by Yeti Construction and Development, a consortium of state-owned development companies which includes Shanghai Chengtou Corp., Shanghai Lujiazui Finance & Trade Zone Development Co., and Shanghai Construction Group.”

And another: “The Story Behind China’s 600-Metre Abandoned Skyscraper.” Goldin Finance 117 was underwritten by Goldin Properties Holding.

Remember that declines in real estate holding values were huge drivers for Japan’s bubble bursting as well as the subprime meltdown that took out Lehman Brothers and Countrywide (among others).

Could China’s house of cards finally collapse in the same way? Very possibly. But remember this caveat:

Greece Officially Defaults on IMF Payment

Tuesday, June 30th, 2015

And verily it came to pass.

Greece lost its financial lifelines Tuesday, as the country missed a crucial payment to the International Monetary Fund amid growing questions about whether it would be able to remain in the euro zone.

Greek leaders had made a last-ditch attempt to come up with the necessary cash, asking European countries for a new bailout hours before its last ones were set to expire, but E.U. finance ministers rejected the request as unrealistic. The missed payment, confirmed by the IMF, was a landmark moment in Europe’s five-year battle to preserve its common currency.

A few more Greek tidbits:

  • Greek banks are about to enjoy some ECB-mandated haircuts. He who pays the piper calls the tune…
  • Dear PIIGS citizens: Don’t blame austerity, blame your corrupt politicians.
  • Europe’s Democracy Deficit:

    The bureaucrats in Brussels and their counterparts in Europe’s national governments are furious with the Greeks for daring to consult their own people. Daniel Hannan, a British member of the European parliament, sarcastically tweeted, “Calling a referendum is, to Eurocrats, the most offensive thing a politician can do.” Stripped of their veneer, Eucrocrats’ arguments against all referendums amount to saying that referendums are a bad idea because they shift power from small cliques of unelected but wise rulers to an unsophisticated, nationalistic mob that might fall prey to populism

  • Via the People’s Cube: Greece declares victory.
  • EuroDoom Roundup: Waiting for the Inevitable Greek Default

    Monday, January 30th, 2012

    You know the problem with doing one of these roundups on the European Debt Crises? I can search for “Euro” just about anytime of the day and night on Google News and come up with a dozen things I could potentially include. So just consider this a Whitman’s European Despair Sampler of possible bad news, as there’s a lot more where this came from:

  • European Finance Minsters on Greece’s latest bond offer: REJECTED.
  • “A Greek Default: It’s a-Comin'”.
  • In exchange for bailing out Greece yet again, Germany wants Greece to cede control over its tax rates and budget to an EU commission (i.e., Germany). It’s almost touching, this German naivety that Greeks can actually be compelled to obey German laws when they can’t even be compelled to obey Greek laws even now. But despite the fact that such government dictates would be ignored just like they are now, Greeks are still furious at the proposal. (Hat tip: Ace.)
  • And if Berlin doesn’t get to call the tune? “Germany and the Netherlands are likely to quit the eurozone rather than swallow an indefinite number of ‘unrequited transfers’ to the union’s crisis-stricken nations.”
  • And even if a deal is reached, it will probably trigger credit default swaps.
  • And if Greece doesn’t blow up the Euro, Portugal will.
  • Fitch downgrades Spain, Belgium, Italy, Slovenia, and Cyprus. (Hat tip: Ace, again.)
  • What will European currency look like after a Euro-zone breakup? Like this.
  • Another month, another EuroZone bailout fund. The rules for the New and Improved Euro Bailout Fund is: 1. “Access [will] be made conditional on signing a new treaty on fiscal discipline.” 2. “Countries representing 85 percent of the fund’s capital [will make] decisions instead of unanimity among the eurozone 17 – will only apply to authorise ESM loans from existing funds.” So 1.) We get an entire new set of fiscal discipline guidelines for the PIIGs governments to ignore, and 2. Germany will call the tune, and the rest of the Eurozone will dance. At least until the next shuffling of the fiscal deck chairs.
  • Well, here’s a headline sure to fill investors with confidence: “From now on, in Europe, everything gets worse.”
  • Spanish unemployment hits 23.4%. And what happens when austerity means they can no longer pay people not to work? That’s he problem with cradle-to-grave European welfare state: sooner or later you run out of your grandchildren’s money…
  • Eurofudge.
  • The Soviet Union yesterday: “We pretend to work, and they pretend to pay us.” Greece today: “The old dynamic—with Greece pretending to make structural changes and its lenders pretending to save it from default—has become untenable.”
  • The whole EU illusion has been predicated on the assumption that Greeks can be made to behave like Germans, and that the EU could manage to forge a new, multi-ethnic, post-national identity in 20 years when Belgium hasn’t been able to do it in almost 200.
  • Cameron caves. Sadly, this behavior is far more in line with his previous record than his brief stint of standing on principle.
  • House Republicans are working to rescind the $100 billion IMF bailout fund Nancy Pelosi helped create. They may not succeed, but they might force the Obama Administration to defend backstopping the Euro at a time when the federal budget is still hemorrhaging red ink…
  • Last week: France’s credit rating makes our latest Euro bailout fund rock solid. This week: oops.
  • The threat of default is also holding up the merger of two Greek banks, maybe because it’s as yet unclear just how they’ll put European taxpayers on the hook for their losses. Once that’s figured out, I’m sure the merger will fly through…
  • Those bondholders who can’t stick it to taxpayers are looking at 70% losses for Greek debt.
  • Just because Italy is broke is no reason for them to drop a bid for the Olympics.
  • More Greek Default Rumblings

    Sunday, September 25th, 2011

    Actually, less rumblings than the roar of an approaching train. And since I temporarily seem to be ahead of the latest Ace of Spades Doom roundup, I’m going to try and give you a nice clear view of the coming crash.

    “No longer a question of if, but when – that is the tone of discussions over Greece which has dominated the summit of finance ministers in Washington over the weekend.” Former Britain’s former finance minister Alistair Darling agrees, calling default “only a matter of time.”

    The talk now is of how to put in a “firewall” to prevent the contagion of an inevitable Greek default from spreading throughout the European banking system.

    The Euroskeptics have been completely vindicated:

    Very rarely in political history has any faction or movement enjoyed such a complete and crushing victory as the Conservative Eurosceptics. The field is theirs. They were not merely right about the single currency, the greatest economic issue of our age — they were right for the right reasons. They foresaw with lucid, prophetic accuracy exactly how and why the euro would bring with it financial devastation and social collapse.

    I think at this point UK residents should be feeling vrey glad indeed that they didn’t abandon the Pound for the Euro.

    Bret Stephens talks about the long line of deceit and fraud that lead Europe to the current crises. “What is now happening in Europe isn’t so much a crisis as it is an exposure: a Madoff-type event rather than a Lehman one.”

    Mark Steyn, using the ever popular music and political metaphor gambit, compares the breakup of the Eurozone with the breakup of R.E.M. while bringing the usual Steyn goodness: “Attempting to postpone the Club Med welfare junkies’ rendezvous with self-extinction will destabilize internal German politics (which always adds to the gaiety of nations).” And this:

    As its own contribution to the end of the world as we know it, the Obama administration has just released a document called “Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction.” If you’re curious about the first part of the title — “Living Within Our Means” — Veronique de Rugy pointed out at National Review that under this plan debt held by the public will grow from just over $10 trillion to $17.7 trillion by 2021. In other words, the president’s definition of “Living Within Our Means” is to burn through the equivalent of the entire German, French, and British economies in new debt between now and the end of the decade. You can try this yourself next time your bank manager politely suggests you should try “living within your means”: Tell him you’ve got an ingenious plan to get your spending under control by near doubling your present debt in the course of a mere decade. He’s sure to be impressed.

    Germany is near the limit of their willingness to bail out Greece.

    There may even be a taxpayer revolt brewing in the Aegean.

    And if the other PIIGS are doing better than Greece, it is only a matter of degrees: “Italy is the new Lebanon, Portugal the new Venezuela, Spain the new Vietnam, Ireland the new Argentina and nothing is more risky than Greece, according to today’s credit default swap market.”

    But it’s not just Greece and Europe that are hitting the wall. China’s housing bubble may finally be bursting. Worse still: “growth in China may be zero [and] China has ‘European kind of numbers’ when it comes to debt.”

    And the Chinese housing bubble isn’t just affecting China. It’s also affecting Canada.

    And at least one observer has drawn parallels to a certain hopemonger currently residing in the White House:

    Obama has no intention of really solving the debt crisis. And that brings us back to Greece. That government has been doing the same thing for a decade and the chickens have now come home to roost. Greece’s debt is 150 percent of its Gross Domestic Product. Our debt has just reached 100 percent of GDP and the debt is accumulating faster than it ever has. If we were looking out the windshield down the road, we could see the crash that’s just up around the bend.

    But rather than put on the brakes, the president has chosen to pick a fight with the other passengers in the car he is driving. Talk about distracted driving! He is gambling that this fight will convince the passengers to let him stay behind the wheel for another four years. But we certainly can’t wait that long. He’s turned up the radio in hopes we won’t hear the ambulance sirens.

    It looks like its going to be another rough week for world markets…