Evergrande?

[LWJ]

So a hiccup, a belch or something worse?

The stock market isn’t happy today 9/20/21.

What does the brain trust say? And, what tactics make sense?

[Tervuren]

I have no idea even why it would dip today.
Nothing new, confirmed, and negative crossed my line of sight.

Strange thing about the market is all it takes is someone very rich shifting money around and it can domino big time.

I'm interested, but ignorant.

[William930t]

Unbelievable mess, company sold over a million apartments in advance and now doesn't have the money to pay contractors to build them. NYT reporting that employees have been asked to loan the company money. I believe US exposure is minimal since we are not "allowed" to invest in Chinese real estate, need more clarification on this, though.

[jyl]

https://carnegieendowment.org/chinafinancialmarkets/

Good analysis here. I've been reading Pettis for a decade or longer. He's insightful and sober. I wonder how it is that the CCP tolerates his existence, but perhaps his writing doesn't get through the Great Firewall to domestic Chinese readers.

The role of property - in particular urban condos - in China is as the primary store of wealth for the wealthy and near-wealthy. Affluent families will buy and sit on 3, 4, 5 condo units as investments, much like affluent US families will own stocks and bond portfolios. Many of those condos are vacant, some aren't even finished , they are investments rather than housing. Meanwhile non-affluent Chinese face a housing shortage and prices higher, relative to their incomes, than we see in the US. The CCP has been trying to force property to be housing and control housing prices.

China also has a debt problem, different from and in some ways bigger than the US debt problem. In the US, the fastest-growing debt is US govt debt, essentially part of the money supply which the US government can both issue and buy (Treasury and Fed). In China, the fastest-growing debt is private (individual, corporate, local province). It has long been assumed that much of this private debt is quasi-govt debt, in the sense that the Chinese govt ultimately stands behind it. The CCP is trying to break markets of that assumption.

Evergrande's collapse was triggered by the CCP's imposition of controls on developer debt, which is part of the efforts mentioned above. The CCP knew or should have known the collapse would happen (Evergrande's founder is extremely highly connected). The CCP shows no signs of easing - witness recent moves against Hong Kong property developers.

If the CCP sat back and let the whole sorry mess spiral out of control, I think it would spread widely in the Chinese economy and eventually to the US. Not that Americans own much Chinese stocks, bonds, or property. But China is the #1 or #2 importer of US goods and services, and the leading exporter to the US, so broad slowdown and disruption in China will impact the US. The markets of course try to anticipate and front-run that.

My guess is that the CCP will step in to control it, perhaps with the Chinese property development sector becoming quasi-nationalized (kind of like what is happening to the Chinese social tech sector - the CCP doesn't "own" BABA but it will control BABA's key assets, tell BABA what it can do and how, and require BABA to donate a large portion of its profits to support CCP initiatives).

In the US, free market capitalism is our core system. In China, it is just a tool of the CCP - they are communists after all.

Anyway, I dumped almost all my China exposure several months ago and don't plan to be lured back in until the new rules of the game are clearer.

[Geneman]

thanks jyl. that is a superb analysis.

[wilnj]

Wealthy Chinese are also storing wealth buying US condos that sit dark and unused creating a similar imbalance here.

[Sooner or later]

Originally Posted by Geneman

thanks jyl. that is a superb analysis.

jyl is quality.

[LWJ]

Agreed. JYL gives clarity. Much appreciated.

[jyl]

Factoids I’m reading about Chinese housing, haven’t verified but sound reasonable from other reading:
- 70-80% of household wealth is housing
- 25% of housing is vacant, held as investment
- housing prices +100% in past decade, principally in massive boom during 2015-19 https://www.globalpropertyguide.com/home-price-trends/China
- household debt/GDP more than doubled in past decade, to >60% https://tradingeconomics.com/china/households-debt-to-gdp (in US, this fell from ~90% to ~80% in same period)

Traditionally housing was bought with cash (not much mortgages) but I think that’s been changing. All that household debt has to be for something. I’m not sure if Chinese mortgages are non-recourse. And even if you bought your condo for cash, losing 20% of its value still hurts.

Remember all the underwater homeowners in the US post-GFC? The CCP must be trying to figure out how to avoid a similar situation.

While reading about this, I learned that the rental market is pretty small compared to the US. https://www.forbes.com/sites/wadeshepard/2019/10/29/china-now-has-an-answer-to-its-housing-crisisits-called-rent/?sh=5b6d40c01a60 Which reinforces how critical housing prices are to household wealth.

[GH85Carrera]

Another example that other countries are just foreign to us.

OK, bad joke. Imagine now people investing in houses or condos and leaving them empty. Any and all housing needs maintenance to keep vermin and water leaks under control. Now image the homeless in the USA break in, start living there and do so for while and the real owner has no idea. The owners will never get to evict those squatters with the silly laws we have.

Anyone that owns multiple houses knows it is a big expense to maintain a house in another state. Vacation homes are expensive, but lots of people have them so certainly not unheard of.

I had a rent house for several years and I will never do that again. We dumped cash into our house and it is paid for. This is a our perfect house, and I am not moving until it is feet first or in a wheel chair. Now I invest in my company and stocks and I am happy to let others own multiple houses. It is not for me.

[mgatepi]

When you buy a new "flat" in China, it is a concrete shell. They are not finished at all.
I imagine the investments they are referring are like this. So I really dont think there is an issue of upkeep.

[Brando]

I anticipate that the CCP will let Evergrande implode. There is no up-side to bailing them out from a communist perspective.

[Bill Douglas]

Originally Posted by mgatepi

When you buy a new "flat" in China, it is a concrete shell. They are not finished at all.
I imagine the investments they are referring are like this. So I really dont think there is an issue of upkeep.

A friend lived in China for many years. He said the poor quality of the builds was absolutely unbelievable. There will be plumbing water spraying everywhere and running into low corners of the apartment, or the one below. Windows leaking.

[jyl]

https://asiamarkets.com/imminent-china-evergrande-deal-will-see-ccp-take-control/

No idea how credible this outlet or its “sources” are, but this seems at least plausible.

Beyond the immediate situation with Evergrande, and other property developers, the CCP has to figure out how to offset a large slowdown - that it will have engineered - in a sector that represents 20-25% of GDP (some say more).

[jyl]

This is an interesting read on how dependent the Chinese economy is on real estate activity and how overpriced housing has become

https://scholar.harvard.edu/files/rogoff/files/nber_27697_peak_china_housing_1.pdf

[Seahawk]

The United States Naval Institute "Proceeding" Podcast hosted by Ward Carroll (great guy) had a great discussion I listened to yesterday:

https://www.usni.org/magazines/proceedings/2021/august/maritime-solutions-continental-conundrums

You have to join but it is well worth it, especially for investors.

Some interesting points about China: Food is the issue as well as an aging population.

All is not well.

[GH85Carrera]

https://imgur.com/JL79TRf

Lots of investments going boom here.

[jyl]

Originally Posted by Seahawk

The United States Naval Institute "Proceeding" Podcast hosted by Ward Carroll (great guy) had a great discussion I listened to yesterday:

https://www.usni.org/magazines/proceedings/2021/august/maritime-solutions-continental-conundrums

You have to join but it is well worth it, especially for investors.

Some interesting points about China: Food is the issue as well as an aging population.

All is not well.

Demographic ticking bomb there.

Countries, like most people, start (income/capita) poor and (demographically) young. If they are lucky, they get rich by the time they get old - think Japan, Western Europe. If they are really lucky, they get rich when they are still middle-aged - that's the USA.
If they are unlucky, they are only middle income by the time they get old - that's China's fate, I think - more in a sec. If they are really unlucky, they stay poor, which also means they stay young but that's no consolation: think Africa.

Countries tend to (demographically) age as they get richer. Aging means the median ages increases. Birth rate declines and lifespans increase. Birth rates decline because getting richer usually means society is more urbanized, crowded, and expensive, women work more, marriages happen later, children need more costly education to succeed. Lifespan increase is from better medical care.

Older means ratio of young prime-age workers to older workers and retirees declines. All things equal, that tends to decrease economic growth and slow the progression toward (demographically) rich.

The USA is exceptional. We got rich before we got old, and are still not getting old while remaining rich. We have a lot of room for family-size housing, and even though birth rates decline, immigration adds a flow of young, motivated, hungry people. Most immigrants work their asses off, assimilate and add to economic growth.

China got to middle-income but is aging fast. One-child policy, urbanization, very high housing and education costs, little immigration, are all driving rapid aging. They are losing the race to get rich before they get old. China's workforce is peaking around now.

The CCP's efforts to increase housing availability and lower housing costs, reduce education costs, and the (too-late) repeal of one-child policy, are aimed at - among other things - slowing the aging. Its efforts to redirect the economy to high-tech and consumer spending, and redistribute wealth from tycoons to ordinary people are aimed at - among other things - sustain the pace of getting rich.

I also think its increasing cultural suppression (gaming, "laying down" youth, homosexuals, "effeminate" men) is more than just a bunch of old Party members being grouchy - I expect a campaign for young people to breed (financial incentives, persuasion via media, coercion via social credit system, etc). Directing/controlling the housing market would obviously be handy.

Xi has a clear view of China's challenges and needs, has consolidated power, and is trying to force what he sees as the needed changes. He is unconstrained by laws and willing to break a lot of eggs.

[tabs]

Originally Posted by jyl

Demographic ticking bomb there.

Countries, like most people, start (income/capita) poor and (demographically) young. If they are lucky, they get rich by the time they get old - think Japan, Western Europe. If they are really lucky, they get rich when they are still middle-aged - that's the USA.
If they are unlucky, they are only middle income by the time they get old - that's China's fate, I think - more in a sec. If they are really unlucky, they stay poor, which also means they stay young but that's no consolation: think Africa.

Countries tend to (demographically) age as they get richer. Aging means the median ages increases. Birth rate declines and lifespans increase. Birth rates decline because getting richer usually means society is more urbanized, crowded, and expensive, women work more, marriages happen later, children need more costly education to succeed. Lifespan increase is from better medical care.

Older means ratio of young prime-age workers to older workers and retirees declines. All things equal, that tends to decrease economic growth and slow the progression toward (demographically) rich.

The USA is exceptional. We got rich before we got old, and are still not getting old while remaining rich. We have a lot of room for family-size housing, and even though birth rates decline, immigration adds a flow of young, motivated, hungry people. Most immigrants work their asses off, assimilate and add to economic growth.

China got to middle-income but is aging fast. One-child policy, urbanization, very high housing and education costs, little immigration, are all driving rapid aging. They are losing the race to get rich before they get old. China's workforce is peaking around now.

The CCP's efforts to increase housing availability and lower housing costs, reduce education costs, and the (too-late) repeal of one-child policy, are aimed at - among other things - slowing the aging. Its efforts to redirect the economy to high-tech and consumer spending, and redistribute wealth from tycoons to ordinary people are aimed at - among other things - sustain the pace of getting rich.

I also think its increasing cultural suppression (gaming, "laying down" youth, homosexuals, "effeminate" men) is more than just a bunch of old Party members being grouchy - I expect a campaign for young people to breed (financial incentives, persuasion via media, coercion via social credit system, etc). Directing/controlling the housing market would obviously be handy.

Xi has a clear view of China's challenges and needs, has consolidated power, and is trying to force what he sees as the needed changes. He is unconstrained by laws and willing to break a lot of eggs.

Typical American Exceptionalist..thinks we are still rich when you have 84T more in liabities than you have total assets..

Americans appear rich because they are borrowing money to sustain an exorbinant lifestyle.

That makes Americans STUPID.

[Sooner or later]

Why are you using future liabilities compared to current assets to come up with the 84 trillion claim.

What are current liabilities and current assets?

Or

What are estimated future liabilities to estimated future assets?