09-24-2021, 09:35 PM
*** 25-Sep-21 World View -- China Evergrande construction firm heads to default
This morning's key headlines from GenerationalDynamics.com
****
**** China Evergrande construction firm heads to default
****
![[Image: g210924b.jpg]](http://Media.GenerationalDynamics.com/ww2010/g210924b.jpg)
An unfinished Evergrande construction project in Taicang, China (Quartz)
Last week, it was clear that China Evergrande Group real estate
construction and retail investment firm was a gargantuan Ponzi scheme
that was headed for default soon, unless the Chinese Communist
government executed an extremely risky bailout. (See "16-Sep-21 World View -- China's Evergrande financial crisis threatens China's financial stability"
)
By Friday, 24-Sept, Evergrande was scheduled to pay $83.5 million in
interest payments on dollar-denominated bonds held by overseas
investors (i.e., non-Chinese). Evergrande missed those payments, but
Evergrade will not be in technical default until a 30-day grace period
has passed.
Evergrande owes another $47.5 million to offshore investors
next week, and $669 million by the end of the year. By the end
of next year, Evergrande has to pay back $7.4 billion, as a
number of bonds mature. All in all, Evergrande has $305 billion
in liabilities.
****
**** Scrambling to avoid a 'systemic' financial crisis and social unrest
****
![[Image: g210924c.jpg]](http://Media.GenerationalDynamics.com/ww2010/g210924c.jpg)
Evergrande interest payments due, 2021-2024 (Bloomberg)
Beijing cannot save Evergrande, but the Chinese Communist regulators
in have announced that they will henceforth be closely supervising
decisions by Evergrande. They will override international financial
norms and agreements to achieve the political ends of preventing a
"systemic" financial crisis or social unrest.
Under direction from regulators, Evergrande has reportedly made
arrangements with local (Chinese) bondholdhers to delay interest
payments.
Offshore (non-Chinese) bond holders will not be made whole. Current
estimates are that if you hold an Evergrande bond, then you'll receive
only 25% of its value, though that number could fall as time goes on.
However, most offshore bond holders are actually large international
banks, like the Swiss bank UBS, which holds $275.7 million in
Evergrande's bonds.
There is little appetite in Beijing to pay back Western bondholders,
but this is offset by worries that Chinese companies will not have
access to dollar funding in the future. So some accomodation will be
made for Western bondholders.
As for local (Chinese) banks, Beijing has injected billions of
additional yuan into the banking system to prevent "contagion" -- bank
failure resulting from Evergrande failure, in the cases where bank
loans won't be repaid.
Beijing is telling Evergrande to pay off Chinese retail investors
first. The objective is to avoid social unrest.
Beijing is also telling Evergrande to finish up its unfinished homes
under construction, for the same reason. Evergrande is estimated to
have a staggering 1.5 million unfinished properties, for which down
payments have been collected, but many of which have stopped
construction, for lack of funding. Private property developers are
being told to prepare to take over projects left unfinished by
Evergrande.
Evergrande's Ponzi scheme involved using the down payments for new
homes to pay off old debts. Many of these down payments were also
used for risky ventures in electric vehicle manufacturing, bottled
water, football clubs, and amusement parks. So now, many of these
homes are incomplete in ghost cities.
Evergrande is offering a fire sale of unfinished or unoccupied
properties, in order to generate cash. Estimates are that you can get
something for 40% of its market value. However, China's real estate
is in a bubble, and there is a fear that this action will cause
property values generally to fall sharply, causing bankruptcies in
other areas of the economy.
Chinese banks, including Bank of China and China CITIC Bank Corp, are
now closely monitoring their own clients and scrutinizing all loans,
to make sure that no other construction firm is about to fail because
of its own Ponzi scheme. Credit is being eliminated or tightened for
fourth-tier and third-tier cities actoss China. Smaller Chinese
banks are themselves being scrutinized for viability.
****
**** The 'moral hazard' problem
****
Whenever any investors or debtors are bailed out for any reason in any
country, there is always a "moral hazard" problem. This is the
problem that risky or reckless behavior should not be rewarded with a
bailout, since that will encourage others to pursue to risky and
reckless behavior.
According to reports, Chinese regulators do not want to get involved
in any sort of bailout of Evergrande or any of its subsidiaries
until the very last moment, and then only if absolutely necessary.
Most analysts seem to believe that the Chinese Communists will be able
to contain the damage from an Evergrande default, with no systemic
damage to China's economy and no sustained social unrest or
rebellions, although investors outside of China may lose all or almost
all of these investments.
****
**** Crypto-currency crackdown
****
Last week's article described a related matter -- a crackdown on
China's Macau, the capital capital of Asia. I'm told that the purpose
of the crackdown was end Macau's use of money laundering, particularly
the practice by wealth mainlanders of using sending money abroad
through Macau.
This week on Friday, the Chinese Communists announced a crackdeown on
crypto-currencies like Bitcoin. Not only will use of cryto-currencies
be made illegal, but any transactions involving the will be illegal.
Once again, this is apparently a way to prevent money laundering,
particularly when used to send money abroad.
Sources:
Related Article:
KEYS: Generational Dynamics, China, Evergrande Group, Ponzi scheme,
UBS, moral hazard, Bank of China, CITIC Bank Corp,
Macau, crypto-currencies, Bitcoin
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 Evergrande construction firm heads to default
- Scrambling to avoid a 'systemic' financial crisis and social unrest
- The 'moral hazard' problem
- Crypto-currency crackdown
****
**** China Evergrande construction firm heads to default
****
An unfinished Evergrande construction project in Taicang, China (Quartz)
Last week, it was clear that China Evergrande Group real estate
construction and retail investment firm was a gargantuan Ponzi scheme
that was headed for default soon, unless the Chinese Communist
government executed an extremely risky bailout. (See "16-Sep-21 World View -- China's Evergrande financial crisis threatens China's financial stability"
)
By Friday, 24-Sept, Evergrande was scheduled to pay $83.5 million in
interest payments on dollar-denominated bonds held by overseas
investors (i.e., non-Chinese). Evergrande missed those payments, but
Evergrade will not be in technical default until a 30-day grace period
has passed.
Evergrande owes another $47.5 million to offshore investors
next week, and $669 million by the end of the year. By the end
of next year, Evergrande has to pay back $7.4 billion, as a
number of bonds mature. All in all, Evergrande has $305 billion
in liabilities.
****
**** Scrambling to avoid a 'systemic' financial crisis and social unrest
****
Evergrande interest payments due, 2021-2024 (Bloomberg)
Beijing cannot save Evergrande, but the Chinese Communist regulators
in have announced that they will henceforth be closely supervising
decisions by Evergrande. They will override international financial
norms and agreements to achieve the political ends of preventing a
"systemic" financial crisis or social unrest.
Under direction from regulators, Evergrande has reportedly made
arrangements with local (Chinese) bondholdhers to delay interest
payments.
Offshore (non-Chinese) bond holders will not be made whole. Current
estimates are that if you hold an Evergrande bond, then you'll receive
only 25% of its value, though that number could fall as time goes on.
However, most offshore bond holders are actually large international
banks, like the Swiss bank UBS, which holds $275.7 million in
Evergrande's bonds.
There is little appetite in Beijing to pay back Western bondholders,
but this is offset by worries that Chinese companies will not have
access to dollar funding in the future. So some accomodation will be
made for Western bondholders.
As for local (Chinese) banks, Beijing has injected billions of
additional yuan into the banking system to prevent "contagion" -- bank
failure resulting from Evergrande failure, in the cases where bank
loans won't be repaid.
Beijing is telling Evergrande to pay off Chinese retail investors
first. The objective is to avoid social unrest.
Beijing is also telling Evergrande to finish up its unfinished homes
under construction, for the same reason. Evergrande is estimated to
have a staggering 1.5 million unfinished properties, for which down
payments have been collected, but many of which have stopped
construction, for lack of funding. Private property developers are
being told to prepare to take over projects left unfinished by
Evergrande.
Evergrande's Ponzi scheme involved using the down payments for new
homes to pay off old debts. Many of these down payments were also
used for risky ventures in electric vehicle manufacturing, bottled
water, football clubs, and amusement parks. So now, many of these
homes are incomplete in ghost cities.
Evergrande is offering a fire sale of unfinished or unoccupied
properties, in order to generate cash. Estimates are that you can get
something for 40% of its market value. However, China's real estate
is in a bubble, and there is a fear that this action will cause
property values generally to fall sharply, causing bankruptcies in
other areas of the economy.
Chinese banks, including Bank of China and China CITIC Bank Corp, are
now closely monitoring their own clients and scrutinizing all loans,
to make sure that no other construction firm is about to fail because
of its own Ponzi scheme. Credit is being eliminated or tightened for
fourth-tier and third-tier cities actoss China. Smaller Chinese
banks are themselves being scrutinized for viability.
****
**** The 'moral hazard' problem
****
Whenever any investors or debtors are bailed out for any reason in any
country, there is always a "moral hazard" problem. This is the
problem that risky or reckless behavior should not be rewarded with a
bailout, since that will encourage others to pursue to risky and
reckless behavior.
According to reports, Chinese regulators do not want to get involved
in any sort of bailout of Evergrande or any of its subsidiaries
until the very last moment, and then only if absolutely necessary.
Most analysts seem to believe that the Chinese Communists will be able
to contain the damage from an Evergrande default, with no systemic
damage to China's economy and no sustained social unrest or
rebellions, although investors outside of China may lose all or almost
all of these investments.
****
**** Crypto-currency crackdown
****
Last week's article described a related matter -- a crackdown on
China's Macau, the capital capital of Asia. I'm told that the purpose
of the crackdown was end Macau's use of money laundering, particularly
the practice by wealth mainlanders of using sending money abroad
through Macau.
This week on Friday, the Chinese Communists announced a crackdeown on
crypto-currencies like Bitcoin. Not only will use of cryto-currencies
be made illegal, but any transactions involving the will be illegal.
Once again, this is apparently a way to prevent money laundering,
particularly when used to send money abroad.
Sources:
- China Evergrande: from ‘controlled demolition’ to near-certain default and state takeover, money managers outline views on unfolding debt crisis (South China Morning Post, Hong Kong, 24-Sep-2021)
- Alarmed by Evergrande, China's lenders hold back on new credit for property developers (Reuters, 24-Sep-2021)
- China tells Evergrande to avoid near-term dollar bond defaults (Bloomberg, 23-Sep-2021)
- S.Korean stocks post weekly decline as Evergrande debt woes continue (Reuters, 24-Sep-2021)
- Evergrande Missed Payment Deadline on Global Bonds, According to Reports. (Barrons, 24-Sep-2021)
- China Steps In To Ensure Evergrande Funds Used To Complete Housing Project, Not Pay Creditors (ZeroHedge, 24-Sep-2021)
- Evergrande Selective Default: Offshore Bondholders 'Run Out Of Hope' (ZeroHedge, 24-Sep-2021)
- Evergrande Auto Hasn't Sold A Single Car, But Has Enriched Its Founder (ZeroHedge, 23-Sep-2021)
- Dow Turns Lower, Tech Slides As Evergrande Default Saga, Supply Chain Chaos Weigh (TheStreet, 24-Sep-2021)
- Evergrande has missed some of its key bond payments. Now what? (Quartz, 24-Sep-2021)
- China declares all crypto-currency transactions illegal (BBC, 24-Sep-2021)
- China's top regulators ban crypto trading and mining, sending bitcoin tumbling (Reuters, 24-Sep-2021)
- UBS Bets on Evergrande Bailout (Finews, 21-Sep-2021)
Related Article:
KEYS: Generational Dynamics, China, Evergrande Group, Ponzi scheme,
UBS, moral hazard, Bank of China, CITIC Bank Corp,
Macau, crypto-currencies, Bitcoin
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
