09-15-2021, 08:47 PM
*** 16-Sep-21 World View -- China's Evergrande financial crisis threatens China's financial stability
This morning's key headlines from GenerationalDynamics.com
****
**** China's Evergrande financial crisis threatens China's financial stability
****
![[Image: g210915b.jpg]](http://Media.GenerationalDynamics.com/ww2010/g210915b.jpg)
Year to date performance of Chinese stocks, battered by new Chinese regulations in numerous sectors (Reuters)
China Evergrande Group is an enormous real estate construction firm
that has built millions of homes and other structures in China, and
which has expanded into other areas, such electric vehicles, a theme
park, a soccer club, a food company, and other areas. However,
Evergrande is now close to default because of its massive debt, and
its inability to meet its obligations.
China's Evergrande financial crisis has been bubbling for several
months, but reaching a turning point on Monday when the company issued
a statement denying that it was close to bankruptcy, but saying that
it was going to hire financial advisers to explore "all feasible
solutions" to its crisis. However, they would not guarantee that the
company will meet its financial obligations. That announcement
provoked protests at Evergrande offices across the country.
Evergrande appears to me to be a giant Ponzi scheme, where new debt is
incurred to cover old, out of control debts.
So Evergrande as a construction firm has completed nearly 900
commercial, residential, and infrastructure projects. But it has 1.5
million unfinished properties, for which down payments have been
collected, but many of which have stopped construction, for lack of
funding. For years, Evergrande has apparently used down payments for
new homes and projects to fund completion of previously committed
projects, leaving no money for the new projects.
Millions of ordinary homebuyers who made down payments on new home
construction are now facing losing their down payments, and getting no
homes. According to press reports, Evergrande now has about 900
unfinished projects, and there are about 1.2 million people waiting to
move in.
In order to fund its Ponzi scheme, Evergrande for years has been
offering investment opportunities in "wealth management products"
(WMPs), which are offered by many Chinese banks and financial
institutions, and which are are unique components of China's shadow
banking system. A retail investor can invest in a WMP, which
supposedly guarantees a high rate of return, but which is not directly
backed by any solid asset, such as real estate. Evergrande pays the
WMP through profits from its real estate business and by issuing its
own bonds. But if the real estate business is not making profits, and
if its bonds are losing value in the financial markets, then
Evergrande will default on the WMPs.
Every Ponzi scheme depends on an accelerating stream of cash to fund
further sales to meet previous debt obligations. As soon as there's a
slowdown in the incoming stream of cash for any reason, like a
recession or new regulations, then the Ponzi scheme crashes. That
seems to be where Evergrande is now. This means that homebuyers,
lenders, bondholders and retail investors are all subject to some or
all of their investments. According to some reports, bondholders will
lose 75% of their investments.
****
**** Will there be a government bailout?
****
As things stand now, Evergrande is going to collapse, possibly into
bankruptcy but at least into massive restructuring. With millions of
people losing some or all of their investments, this could lead to
China's dreaded "social unrest." Evergrande's headquarters are
located in Shenzhen, which is on the mainland adjacent to Hong Kong,
in southern China which has historically been the crucible of China's
previous massive rebellions, including Mao's Communist Rebellion
(1934-49) and the huge Taiping Rebellion (1854-64). The Chinese
Communists are well aware of this history.
The Beijing government may decide that Evergrande is "too big to
fail," and bail the company out. But Evergrande has publicly
acknowledged $300 billion in debt, and so a bailout would test even
the Communist government's resources.
But it's more complicated than even that. For years, there have been
news stories about ghost cities where entire towns had been built with
homes and stores, all of which remained empty and unoccupied. Many
individuals purchased these homes, not to live in, but as an
investment, hoping to cash in when they finally became occupied and
increased in value. Instead, they're now worth much less than their
original prices, and they're sitting empty, with no hope of occupancy.
Another problem is that if Evergrande defaults, then the entire real
estate market could collapse, as millions of new properties could
possibly come on the market at the same time.
So a bailout might cost China's government considerably more than the
$300 billion in debt.
****
**** China Huarong Asset Management bailout
****
So bailing out the Evergrande Ponzi debt might be too expensive even
for China. Even worse, it may result in contagion. Investors in
other large financial firms with huge exposures might demand similar
bailouts.
It was just last month that Beijing executed a much smaller bailout.
China's Huarong Asset Management announced a $16 billion net loss for
2020. After months of saying nothing, the Chinese Communist
government finally gave in and agreed to a bailout, for fear that a
Huarong bankruptcy could destablize China's financial system.
The way that the bailout would work is that Huarong will issue new
shares to five state-owned companies -- Citic Group, China Insurance
Investment, China Life Asset Management, China Cinda Asset Management
and Sino-Ocean Capital Holding. By purchasing these shares, the five
state-owned companies would provide a huge cash infusion to Huarong.
So if that worked for Huarong, would it also work for Evergrande?
Well, Huarong lost a mere $16 billion, while Evergrande is at least
$300 billion in debt, and possibly much more. So it may not even be
possible.
****
**** Generational Dynamics analysis
****
There are several typical behaviors that generations and populations
exhibit during a generational Crisis era, like the one we've been in
since the beginning of the century. At this time, all the people who
survived the previous generational crisis war (World War II) have all
died or retired, and the new generations in power (Gen-X, Millennials)
have no memory of the lessons learned. They forget the nationalism
and xenophobiat that caused the World War II, and they forget the
profligacy that resulted in the previous major financial crisis
(1929). They say that history doesn't repeat itself but it rhymes,
and we're seeing that now.
I've written much about China's increasing xenophobia and nationalism
directed at Japan and Taiwan, and I won't repeat it here, but I want
to focus on profligacy.
The United States is already %28 trillion in debt, and is
contemplating new legislation that will add $5 trillion more to the
debt. That's absolutely ridiculous, and will result in the worst
financial crisis in the history of the world.
China is also incurring historically high levels of debt, with no end
in sight. At some point there will be a major financial crisis in
China, with tens or even hundreds of million people losing their life
savings as the crisis spreads from company to company.
That will give rise to the Beijing's nightmare scenario, massive
social unrest, possibly turning into rebellion.
****
**** China's Macau crackdown and contagion to United States
****
Macau is similar to Hong Kong in that it is a special administrative
region in southern China. However, Macau is the gambling capital of
Asia, competing against Las Vegas for customers.
On Tuesday, China's regulators announced changes to the gaming law
that would give the government much greater control over the casinos,
and possibly a larger share of the earnings.
You may think that this is an internal Chinese matter, but it's not.
Almost all the casinos are operated by American companies -- Sands
China, Wynn Macau, Galaxy Entertainment, SJM Holdings, Melco
Entertainment and MGM China. And Macau stocks lost a third of their
value, around $14 billion, because investors feared that China would
impose tighter regulations.
This illustrates how tightly interlocked the Chinese and American
companies are, and a global financial crisis in one country will cause
a chain reaction financial crisis in the other.
Sources:
Related articles:
KEYS: Generational Dynamics, China, Evergrande Group, Ponzi scheme,
Taiping Rebellion
Huarong Asset Management, Citic Group, China Insurance Investment,
China Life Asset Management, China Cinda Asset Management,
Sino-Ocean Capital Holding, Japan, Taiwan, Macau, Las Vegas,
Sands China, Wynn Macau, Galaxy Entertainment,
SJM Holdings, Melco Entertainment, MGM China
Permanent web link to this article
Receive daily World View columns by e-mail
Contribute to Generational Dynamics via PayPal
John J. Xenakis
100 Memorial Drive Apt 8-13A
Cambridge, MA 02142
Phone: 617-864-0010
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.gdxforum.com/forum
Subscribe to World View: http://generationaldynamics.com/subscribe
This morning's key headlines from GenerationalDynamics.com
- China's Evergrande financial crisis threatens China's financial stability
- Will there be a government bailout?
- China Huarong Asset Management bailout
- Generational Dynamics analysis
- China's Macau crackdown and contagion to United States
****
**** China's Evergrande financial crisis threatens China's financial stability
****
Year to date performance of Chinese stocks, battered by new Chinese regulations in numerous sectors (Reuters)
China Evergrande Group is an enormous real estate construction firm
that has built millions of homes and other structures in China, and
which has expanded into other areas, such electric vehicles, a theme
park, a soccer club, a food company, and other areas. However,
Evergrande is now close to default because of its massive debt, and
its inability to meet its obligations.
China's Evergrande financial crisis has been bubbling for several
months, but reaching a turning point on Monday when the company issued
a statement denying that it was close to bankruptcy, but saying that
it was going to hire financial advisers to explore "all feasible
solutions" to its crisis. However, they would not guarantee that the
company will meet its financial obligations. That announcement
provoked protests at Evergrande offices across the country.
Evergrande appears to me to be a giant Ponzi scheme, where new debt is
incurred to cover old, out of control debts.
So Evergrande as a construction firm has completed nearly 900
commercial, residential, and infrastructure projects. But it has 1.5
million unfinished properties, for which down payments have been
collected, but many of which have stopped construction, for lack of
funding. For years, Evergrande has apparently used down payments for
new homes and projects to fund completion of previously committed
projects, leaving no money for the new projects.
Millions of ordinary homebuyers who made down payments on new home
construction are now facing losing their down payments, and getting no
homes. According to press reports, Evergrande now has about 900
unfinished projects, and there are about 1.2 million people waiting to
move in.
In order to fund its Ponzi scheme, Evergrande for years has been
offering investment opportunities in "wealth management products"
(WMPs), which are offered by many Chinese banks and financial
institutions, and which are are unique components of China's shadow
banking system. A retail investor can invest in a WMP, which
supposedly guarantees a high rate of return, but which is not directly
backed by any solid asset, such as real estate. Evergrande pays the
WMP through profits from its real estate business and by issuing its
own bonds. But if the real estate business is not making profits, and
if its bonds are losing value in the financial markets, then
Evergrande will default on the WMPs.
Every Ponzi scheme depends on an accelerating stream of cash to fund
further sales to meet previous debt obligations. As soon as there's a
slowdown in the incoming stream of cash for any reason, like a
recession or new regulations, then the Ponzi scheme crashes. That
seems to be where Evergrande is now. This means that homebuyers,
lenders, bondholders and retail investors are all subject to some or
all of their investments. According to some reports, bondholders will
lose 75% of their investments.
****
**** Will there be a government bailout?
****
As things stand now, Evergrande is going to collapse, possibly into
bankruptcy but at least into massive restructuring. With millions of
people losing some or all of their investments, this could lead to
China's dreaded "social unrest." Evergrande's headquarters are
located in Shenzhen, which is on the mainland adjacent to Hong Kong,
in southern China which has historically been the crucible of China's
previous massive rebellions, including Mao's Communist Rebellion
(1934-49) and the huge Taiping Rebellion (1854-64). The Chinese
Communists are well aware of this history.
The Beijing government may decide that Evergrande is "too big to
fail," and bail the company out. But Evergrande has publicly
acknowledged $300 billion in debt, and so a bailout would test even
the Communist government's resources.
But it's more complicated than even that. For years, there have been
news stories about ghost cities where entire towns had been built with
homes and stores, all of which remained empty and unoccupied. Many
individuals purchased these homes, not to live in, but as an
investment, hoping to cash in when they finally became occupied and
increased in value. Instead, they're now worth much less than their
original prices, and they're sitting empty, with no hope of occupancy.
Another problem is that if Evergrande defaults, then the entire real
estate market could collapse, as millions of new properties could
possibly come on the market at the same time.
So a bailout might cost China's government considerably more than the
$300 billion in debt.
****
**** China Huarong Asset Management bailout
****
So bailing out the Evergrande Ponzi debt might be too expensive even
for China. Even worse, it may result in contagion. Investors in
other large financial firms with huge exposures might demand similar
bailouts.
It was just last month that Beijing executed a much smaller bailout.
China's Huarong Asset Management announced a $16 billion net loss for
2020. After months of saying nothing, the Chinese Communist
government finally gave in and agreed to a bailout, for fear that a
Huarong bankruptcy could destablize China's financial system.
The way that the bailout would work is that Huarong will issue new
shares to five state-owned companies -- Citic Group, China Insurance
Investment, China Life Asset Management, China Cinda Asset Management
and Sino-Ocean Capital Holding. By purchasing these shares, the five
state-owned companies would provide a huge cash infusion to Huarong.
So if that worked for Huarong, would it also work for Evergrande?
Well, Huarong lost a mere $16 billion, while Evergrande is at least
$300 billion in debt, and possibly much more. So it may not even be
possible.
****
**** Generational Dynamics analysis
****
There are several typical behaviors that generations and populations
exhibit during a generational Crisis era, like the one we've been in
since the beginning of the century. At this time, all the people who
survived the previous generational crisis war (World War II) have all
died or retired, and the new generations in power (Gen-X, Millennials)
have no memory of the lessons learned. They forget the nationalism
and xenophobiat that caused the World War II, and they forget the
profligacy that resulted in the previous major financial crisis
(1929). They say that history doesn't repeat itself but it rhymes,
and we're seeing that now.
I've written much about China's increasing xenophobia and nationalism
directed at Japan and Taiwan, and I won't repeat it here, but I want
to focus on profligacy.
The United States is already %28 trillion in debt, and is
contemplating new legislation that will add $5 trillion more to the
debt. That's absolutely ridiculous, and will result in the worst
financial crisis in the history of the world.
China is also incurring historically high levels of debt, with no end
in sight. At some point there will be a major financial crisis in
China, with tens or even hundreds of million people losing their life
savings as the crisis spreads from company to company.
That will give rise to the Beijing's nightmare scenario, massive
social unrest, possibly turning into rebellion.
****
**** China's Macau crackdown and contagion to United States
****
Macau is similar to Hong Kong in that it is a special administrative
region in southern China. However, Macau is the gambling capital of
Asia, competing against Las Vegas for customers.
On Tuesday, China's regulators announced changes to the gaming law
that would give the government much greater control over the casinos,
and possibly a larger share of the earnings.
You may think that this is an internal Chinese matter, but it's not.
Almost all the casinos are operated by American companies -- Sands
China, Wynn Macau, Galaxy Entertainment, SJM Holdings, Melco
Entertainment and MGM China. And Macau stocks lost a third of their
value, around $14 billion, because investors feared that China would
impose tighter regulations.
This illustrates how tightly interlocked the Chinese and American
companies are, and a global financial crisis in one country will cause
a chain reaction financial crisis in the other.
Sources:
- Evergrande crisis deepens as protests break out in China (Business Times, Singapore, 13-Sep-2021)
- Evergrande Hires Advisers to Resolve Cash Crisis Amid Protests (FinancialPost/Bloomberg, 13-Sep-2021)
- Wealth management products / Cover Story: The Lagging Overhaul of China’s $3.9 Trillion Bank WMP Sector (Caixing, 21-Jun-2021)
- What Is China Evergrande and Why Is It In Trouble? (Bloomberg, 14-Sep-2021)
- Evergrande: Why the Chinese property giant is close to collapse (Deutsche Welle, 15-Sep-2021)
- Ponzi / What Would A Restructuring Of Evergrande Look Like? (Forbes, 13-Sep-2021)
- Billions blown as Macau casino investors fold amid gambling review (Reuters, 15-Sep-2021)
- Factbox: How Macau is revising its multi-billion dollar gaming industry (Reuters, 15-Sep-2021)
- Factbox: China crackdown wipes hundreds of billions off top companies' values (Reuters, 13-Sep-2021)
- China Huarong announces state bailout alongside $16bn loss (Nikkei, 19-Aug-2021)
- Evergrande is such an important real estate developer that China is likely to bail it out: Economist (CNBC-video, 8-Sep-2021)
- EU refuses to bail out Montenegro's China loan (EU Observer, 13-Apr-2021)
Related articles:
- Explanation of Price/Earnings ratio and Stock Valuations (28-Aug-2015)
- The hysteria over inflation in a deflationary era (15-Jun-2021)
- George Soros speech at Davos marks significant global shift against China (27-Jan-2019)
- Understanding deflation: Why there's less money in the world today than a month ago. (10-Sep-2007)
- China's 'Anti-Secession' law infuriates Taiwan (08-Mar-2005)
- China approaches Civil War (16-Jan-2005)
KEYS: Generational Dynamics, China, Evergrande Group, Ponzi scheme,
Taiping Rebellion
Huarong Asset Management, Citic Group, China Insurance Investment,
China Life Asset Management, China Cinda Asset Management,
Sino-Ocean Capital Holding, Japan, Taiwan, Macau, Las Vegas,
Sands China, Wynn Macau, Galaxy Entertainment,
SJM Holdings, Melco Entertainment, MGM China
Permanent web link to this article
Receive daily World View columns by e-mail
Contribute to Generational Dynamics via PayPal
John J. Xenakis
100 Memorial Drive Apt 8-13A
Cambridge, MA 02142
Phone: 617-864-0010
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.gdxforum.com/forum
Subscribe to World View: http://generationaldynamics.com/subscribe
