Generational Dynamics World View

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(09-15-2021, 08:47 PM)John J. Xenakis Wrote: *** 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
  
• Will there be a government bailout?
  
• China Huarong Asset Management bailout
  
• Generational Dynamics analysis
  
• China's Macau crackdown and contagion to United States
  

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**** China's Evergrande financial crisis threatens China's financial stability
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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.

The People's Republic is a capitalist system. The fault is that it operates under no moral constraints. A criminal who can turn a profit for a while can do very well for a while, but can also generate a bigger crash. This is nothing new; just look at the Stavisky affair in France in the 1930's in which a shyster pulled off a Madoff-like scheme to bloat illusory assets while pocketing real money. 

Ideally capitalists operate with some measure of moral compass, whether such results from religious devotion or sophisticated philosophy. The first rule is "Do not hurt your customers, whether direct or indirect". People are in prison for a very long time because someone sold bad peanut butter to Kellogg's Keebler division, and Kellogg's took revenge by turning over documents of the transactions and test results on the bad peanut butter to prosecutors. The second is "Do not hurt your investors". Big problems arise when either happens, and the bigger the scale of the harm, the bigger is the damage on a nationwide scale. 

The late arch-conservative economist Friedrich Hayek (1899-1992) recognized all financial bubbles as disasters by nature for devouring assets and precluding other investments. Making large investments in a financial bubble is like putting prime rib before a dog and expecting what leaves the opposite side of the dog to be precious. Financial bubbles do much the same to capital as a dog does to an expensive cut of meat. Shysters have as ravenous appetites for capital as dogs have for meat. The difference is that operators of a bubble are adept at creating the illusion of prosperity in easy money for investors until people get wise to the reality that anything can be overpriced; once the perception is in that the prosperity is an illusion, everything gets recognized as worthless. A panic ensues, as in 1929 or 2008.

Can I fault the Chinese Communist party? Sure -- for destroying the Confucian heritage that created some moral compass from antiquity to Mao's overthrow of the Republic of China, and the repression of foreign bases of morality such as Christianity and Islam* that might serve if Confucian ethical values are not restored. Morality isn't superstition; it is necessity. China now resorts to harsh penalties, typically death, for large-scale ethical lapses in a country that has fewer restraints on greed and deceit than countries with longer-established capitalist systems. Capitalism does not create morality, but a society with free enterprise must have some morality in place lest "free enterprise" simply mean that Enterprise is free to do whatever its owners, investors, and managers want to do to everyone else. 

Aside from criminal triads, Overseas Chinese are generally good people with whom to have dealings. 

Quote: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.

All economic bubbles are Ponzi schemes except for not having one arch-shyster like Ponzi, Stavisky, or Madoff on which to lay all the blame. They often have the complicity of high government officials who ride a tide and fail to see the sharks in the event of a wipe-out. It is best that bankers be deputized with the role of guardians of Other People's Money to the extent that bankers are more bureaucrats than entrepreneurs. When bankers become entrepreneurs instead of recyclers of capital, then all Hell breaks loose in the economy.   

Quote: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.

There's nobody to stop what Robert Ringer calls "LSD deals" in China because leaders have assumed that growth solves all problems. What we have learned in America is that whatever faults exist in a business grow with or even faster than the business. Just because a mathematical simulation looks good does not mean that it is good. Figures don't lie, but liars can figure. At least we have a Judeo-Christian ethic built into our culture to the extent that people who reject the religion still generally cleave to the ethical values. The Maoists destroyed all ethical values as "obsolete" or "superstitious", and the post-Maoists have offered nothing more than carrot and stick -- or should it be more "indulgence" and "firing squad"? 

American banks typically make borrowing a privilege. Everybody seems to have some idea of how to make easy money, but the banks rightly insist that the persons who stand to make the most money take the risk of ruin. Thus, bankers typically demand that borrowers put up more collateral in the event of a failure so that the bank is not hurt, and that borrows put the payment of interest and principal above executive compensation and expansion projects. But such is how things have been structured since the 1930's. Yes, this may have thwarted some innovative new business or two that could have created untold wealth, but it has also done far more to ensure that scatterbrain plans never go beyond the dream of some kid still living in his parents' home, with that kid eventually deciding that it makes more sense to start a career at Wendy's or Wal*Mart -- or perhaps take a hint from second-cousin Pete that meat-cutting or auto-body repair isn't a bad career after all.  

Quote: 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

.
Much wisdom is to be found in comedy, and Will Rogers once said that the problem leading to the Great Depression was that people were looking for high returns on capital instead of return of their capital. Evidence of the maturity of a capitalist order is that returns on investment shrink because there aren't so many pressing needs to meet. Sweatshops producing shoes for barefoot peasants and industrial workers can be inordinately profitable, as shoes are not a take-it-or-leave-it proposition. With most technological stuff, all innovations are take-it-or-leave-it propositions. I have a ten-year-old TV set, which is amazingly durable in view of its predecessors. I can hold off on buying one of the newfangled ones with a curved picture screen, all sorts of built-in streaming services, and the like. Most replacements now involve clear improvements as something becomes obsolete in the sense of "lacking support". In effect, you cannot get the latest Disney flick on VHS tape. OK...  the promise of very high returns indicates either illicit quality of the transaction or a fraudulent pitch. Think of lenders in the Double-Zero decade delighted to get people into housing with a loan that they were sure to default... of course in a place of rising real-estate values, so that when (and rarely so much if) the mortgagor defaulted, the lender would have an appreciated asset to resell. We all know how that worked. Housing prices soared much faster than incomes, and eventually the speculative frenzy ends up with no more buyers. Then comes the large-scale panic.       

Quote: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.

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**** Will there be a government bailout?
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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.

Too big to fail -- or too corrupt to support? We Americans may find sooner than later that some of the entities that Dubya and Obama deemed Too Big to Fail have become Too Corrupt to Support. Should we ever deem that corporations that hire large numbers of well-educated workers in bureaucracies in which nobody really knows what he is doing except what to do with paperwork Too Corrupt to Support, then we could have some huge problems, not only in people losing jobs and retirement assets vanishing, but also a bunch of overpaid bureaucrats devoid of any tangible skills finding themselves with the time to spend in libraries and lacking the money to pay for cable TV on the Idiot screen  in which they find Marxist-Leninist literature the anodyne instead of going to work for Wendy's or Wal*Mart. Alienated intellectuals (think of the late and unlamented Abimael Guzman), and not laborers, start proletarian revolutions.  There's nothing abstract about hardships that the proles endure, but for the non-proles, life is far more complex as are the causes of their psychic distress.   

Quote: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.

I wondered about that. Was it some foresight that the PRC had that Overseas Chinese might have to take refuge in China in the event of persecutions? Model minorities, like Jews in Germany, South Asians in Uganda, ethnic Chinese in Indonesia -- or Jews, South Asians, or ethnic Chinese in America -- are especially vulnerable in the event of populist assaults upon high-achieving minorities. We are just lucky so far that such a disaster for us all has yet to happen here. (Mr. Xenakis, there's a fellow named Classic X'er who posts elsewhere who makes much about white identity if not putting it into such words, and fails to realize that the system of which he dreams that treats minorities harshly in the supposed aid of white losers can eventually hurt someone like him). 

Quote: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.

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**** China Huarong Asset Management bailout
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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 destabilize 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.

Too Big to Fail -- or Too Corrupt to Save? Ay, that's the rub. 

Quote: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 xenophobia 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.

The best Boomers got the lessons of the Crisis Era seared into them. I can be born ten years after the end of World War II, and the images of that great calamity are seared into my mind. I can draw conclusions, and Nazi ideology or anything resembling it (such as Ku Kluxism, which has become practically the same anti-human $#!+) offends me. All that kept me from thwarting the catastrophic bubble of the Double-Zero decade was that I was in no position in which to stop it. People needed affordable housing, even if it was dreary flats that one might expect in Hong Kong. 

Much of the problem is that we misapply the old lessons. American leaders, political and military, saw an analogue for Communist insurgencies in Vietnam, Cambodia, and Laos in Nazi aggression instead of consequences of failures of the political and economic orders in those countries. The first refutation is that Commies eventually took over, The second is that Thailand has never become a Commie state. Perfect foresight is a rarity; thus astrologers remain in business.

*The Uigurs are Muslims and not Chinese. .