China defaults hit record in 2018, and the 2019 pace is triple that
bloomberg.com
bloomberg.com
One of my classmates is a senior finance manager or something for a Chinese real estate company. Just finished a macro economics class where the professor identified various issues and risks around the world and particularly identified corporate debt and real estate prices (among other things) as being a really big risk in China. He also happens to get invited to advise the top of the top levels of the Chinese government on their economic planning, so he very much has a horse in this race.
So my real estate finance manager classmate objected to real estate prices being a risk. She told the professor in front of the class that if things ever get bad, the Chinese government will step in and take care of everyone. This prof advises the government about their economic risks and she's telling him there's no risk.
I have no idea what to think anymore. The world is crazy.
If oil prices stay above $60 OR the U.S. keeps tariffs on China OR there is a global slowdown:
Chinese (and especially Hong Kong) real estate is in for a really bad time.
I want to point out, this isn't doom and gloom. Although China has a 90%! home ownership rate, prices could collapse 90% (they won't), and it would only affect speculators and people who bought their first home in the last 5 years (almost no one. No ordinary person can afford a first home).
See the 45 minute interview here: https://www.realvision.com/tv/shows/interviews/videos/chinas...
How do you arrive at that claim? ~78% of all household assets in urban China are held in residential housing ownership. A 90% housing price collapse would be beyond catastrophic to China's economy and household wealth across the board. In rural China, residential housing values represent ~65% of household wealth.
China's household assets being so extremely concentrated to housing is unique among major economies. In the US, the residential real-estate market represents closer to 35% of household assets (in the UK it's around 50%).
Financial assets are only 12% of urban Chinese household assets, compared to 43% in the US.
China can't afford anything to go wrong in their residential housing market, much less a 90% price decline.
If the Yuan collapses, that's good for exports, which is good for jobs. If house prices collapse, it only matters if you're trying to sell your house. You won't need to sell your house if you have a job.
It's only bad if you're leveraged on real estate and dependent on prices increasing -- a speculator.
You know who is the most leveraged on Chinese real estate? Local governments and the mega rich.
The vast majority of Chinese spending is on domestic goods and real estate. If those things become cheaper, that's good for the average Chinese person (and for importers or Chinese goods -- I.E. everyone else in the world).
China's growing dependence on imported oil could be problematic. But they're being really smart about their unbelievably fast growing electric bus fleet.
It is important to note that a huge portion of Chinese jobs are related to real estate / construction. If the market collapses, a lot of those jobs will go away. But these aren't particularly high paid or specialized jobs. The growth of factory jobs should absorb them. The only thing that would stop that is if the U.S. increases tariffs farther.
I think it'd be more like Dot Com in the U.S. Stocks dropped like a rock, but the average person in the U.S. hardly noticed. I don't think it'd be like 07 -- even though it seems more related.
It's not like China is the first country in the world that has fixed-year leases on housing. I know for a fact that you can find such properties in both Canada, and the United Kingdom.
people are saying stuff like: buying an apartment in the US or in singapore is better than buying one in china, not realizing that they are effectively different models. calling it "ownership of a longterm lease" is a very good name that much better describes the reality. (it's the first time i see that term, but it just makes sense)
I could imagine there being a price drop on property nearing its expiration, so much so that there's no point in maintaining it if it just goes back to the government.
also, in china maintenance is only done when necessary and when it brings profit.
Sure, you may "own" a piece of land with a building on it that you had paid for, but the govt can seize it without repaying fair value. Or you may fully "own" a company, but you can only make decisions that fall in line with the party's line.
It can also do that in the United States, through particularly tortured (and often unfair) application of eminent domain.
It is just like eminent domain. And yes, people quibble over fair market value. They do so in the US, too. Poorer communities have been hit very hard by it.
[1] https://www.nytimes.com/2019/04/26/opinion/china-belt-road-i...
Very much it, real estate is a collateral in great many gigantic debt packages.
A lot of Chinese multinationals have real estate wings exactly for this reason — providing a lot of collateral for loans and trust bonds.
The speculation is that a lot of real estate collateral is gigantically overvalued or simply does not exist
I've met many people in my life just like your classmate. They're especially common in the real estate industry. You're right, the world is crazy.
When making my cases at work, I need to frame the talking points from the perspective of how choosing my decision will benefit the person's salary.
I don't know if I like that realization, but it seems logical.
It doesn't feel good to manipulate people like that. I feel like they should know what's best for them and decide with the facts. But maybe they don't know better for themselves or their priorities in life are different.
To think about programming people like I think about programming computers feels dehumanizing. Like I shouldn't be doing it.
Like it's wrong to take someone's freewill away.
That's essentially the definition of a bubble cycle: a mass delusion, eventually suddenly punctured by the imposition of reality.
The CCP dug its own grave here like many other things. It monopolized land and dictates/manipulates prices, hijacked the people and economy using the housing market, in turn it also assumed the responsibility.
Chinese are protesting and vandalizing when prices fall. https://www.google.com/search?q=%E7%A0%B8%E5%94%AE%E6%A5%BC%...
Serious question.
If I'm in China, and my money for escaping from China is in Vancouver real estate, and Vancouver real estate falls, then if I ever decide to escape China, I may have to work rather than be independently wealthy. That's not as big a deal as not being able to take care of my parents. And my anger is directed at Canada, not China, so it's less socially explosive. (Less explosive even to Canada - it wasn't their job to make it easy for me to escape from China.)
Or so it seems to me, a non-Chinese (and even non-Canadian)...
Right now, there is a working-people boom globally, as most of the post-1950 baby boom is in their working years, national barriers to trade have fallen down, and the huge post-1985 population boom is entering the workforce. A lot of people are working, and there are relatively few old people to take care of. This has led to a global savings glut - people are financially saving some of their earnings to take care of their eventual old age.
This situation will not last forever - the global baby boomers will enter retirement, life expectancy is increasing, and the generation after Millenials (and their global equivalents) is tiny, with fertility falling off a cliff even in developing nations. That means fewer working people supporting more retirees. Technology has been stubbornly ineffective at increasing elder-care productivity, even as it's been very effective at increasing life expectancy. No financial engineering in the world can paper that over - regardless of how many dollars are injected into the economy, how much people have in their 401k, how much is in their bank account, and how many homes they own, there are still only a set number of people available to care for elders. Additional savings just means the price of elder-care will rise to soak up all the savings, and the price of assets will fall as people rush to sell them to afford the increasing price of elder-care.
The result is potentially explosive. People who assumed they have enough set aside for a comfortable retirement will find that a.) a "comfortable retirement" becomes increasingly more expensive and b.) the value of those assets is suddenly falling. There will be widespread calls for the government to fix things, but there's nothing within the government's power to fix: it still takes a certain amount of labor to help your grandparents out of bed, change their bedpans, bathe them, measure their medications, etc. So the chance of social unrest becomes dramatically higher, which means that maybe that escape plan of moving to Vancouver is pretty important. That just exports the problem, though, and destabilizes other countries.
Does this mean kids born today will have better jobs, higher pay, cheaper real estate. This seems like a good thing.
Only semi-accepted economics, but a boiled down version: https://www.youtube.com/watch?v=PHe0bXAIuk0
In short, if consumption falls, the economy can't help but fall with it. Which is what's commonly called a demographic time bomb. Especially in the US, where our social security systems are funded out of current workers, not by savings.
The only way to escape the trap (hypothetically) would be to invest heavily enough in capital expenses / automation during booming demographic times, implement a consumption-driving basic income funded by that boom, then throw up substantial barriers to prevent that money from trickling out to the rest of the world's economy (as without barriers you'd just be supporting foreign economies). This would look VERY different from business-as-usual as it's a 180 against free trade.
1.3 billion people will produce a lot of winners, and they desperately want to keep their wealth safe somewhere like all the party officials do, that place won't be China.
Shanghai's average salary last year is around 11.5K usd, while an average 80m²/861sq.ft condo there sells for 558K usd(bare concrete, pay additional cost to do plumbing, wiring, flooring and furnishing), and this will be one at a very undeveloped part far far far from downtown in a city of 2,448 mi².
I saw a documentary that said most of the condos are owned by collections of families, is that right? And they buy third and fourth homes too. They all sit empty. Fueled buy municipal loans.
What will happen to the families who own all those condos that become worthless?
The best I can tell is the Chinese debt cycle is well into the period where the loans are being taken out almost solely to pay off interest on existing debt. For Q1 2019, the debt increase was 9% of 2018 GDP (somewhere from Bloomberg.) That is a startling number. I presume that is private & public debt, but I'm not sure.
Presuming some sort of very large scale bailout occurs, and the debt is monetized, the renminbi should drop in value against other currencies and then China should experience inflation. That is the theory, at least. That isn't what happened with Japan. However, if you look at Japan, they are still fighting what happened during the 1980s. Per 2018 numbers, the Bank of Japan owns 77 1/2 percent of Japanese ETFs. All kinds of other distortions have occurred, and Japan is a very and complex issue in itself.
I don't think it is possible to predict what will happen. You can, to some extent, state that if X and Y happen then Z is impossible.
Analysts are looking at Japan and wondering what similarities or indications of what direction China could head in. There is some hint, but the Chinese people are much poorer and the Chinese government is quite different than Japan. The Chinese government also has a very close example to retro-actively observe while other investment driven growth stories like Brazil were quite distant both geographically and culturally.
The big unknown is, who is going to eat shit? Some big part or parts of the Chinese economy will. Who the government transfers the losses to determines what can and can not happen in the longer term.
There is a very good possibility that this will end in a poof, and China will not see significant growth again for a very, very long time. A lot of the stories being told about China's tech leadership look very similar to Japan in the 1980s. China's population pyramid isn't great either. Their population will peak in about 10 years and then begin shrinking.
Footnote: A lot of focus is on what direction prices go. A better focus would be on consumption power. When there is runaway inflation you can say, look the prices shot up I'm rich, but if your purchasing power dropped 90% you may be much poorer.
Based on recent history, as long as it's everyone except the PLA, the existing Chinese political system will survive. Mao was right about that much.
Not that it isn't going to be extremely ugly.
If you could afford it as a Chinese citizen, you'd have to be crazy not to be hedging personal wealth outside of China at the moment.
The US government very much did not do that. The US let a lot of banks fail and housing prices to collapse. They did save a few banks, and most bank customers. But, most of this was adding short term liquidity to the market and otherwise healthy organizations.
PS: “Mark to market” https://en.m.wikipedia.org/wiki/Mark-to-market_accounting is an important safeguard. But, it increases the short term risks of systemic collapse.
That being said, there's a widespread belief called "Greenspan put" or "Fed put": https://www.daytrading.com/fed-put
As long as they have a semi-accurate pulse on real asset values, as a lender of last resort they have the sole ability to buy assets at distressed values. Nobody else has the ability to take a bath as the market implodes and simply create new capital to buy things at less-than-face-value.
You'd only expect things to go really bad if the Fed mispredicted actual values.
The world is crazy. Best to build that into your models.
I suspect you might go far.
Here is the positive spin on the story. Defaults mean someone is taking pain for taking on too much leverage. That means relieving pressure from the system, which is–in the long-term–better for global stability than China trying to extend and pretend.
The Fed and western policies get a lot of flak for "too big to fail" but in the end, they still let them fail...just very softly and to prevent systemic shock. That's not the Chinese model at all.
That's also the view in the US (government will step in to make losers whole), which explains why bubbles keep re-inflating.
Their second goal is a growing economy, so that the people can be richer, on the thinking that richer people have more to lose, and less like to cause social upheaval.
The end result of this is that China will continue to contort itself to satisfy its goal. Just like the Thanksgiving Turkey, this works great...right up until it doesn't.
What I hope HN people are doing in the background is contemplating what happens on that Day of Reckoning, and how it impacts them and their lives.
If that day happened tomorrow, commodity prices would drop across the board. Oil would drop, as would gas, coal, grains, livestock. That would be great (unless you are employed in those industries).
Then, real estate prices will drop, as the Chinese trying to get money out of the country won't be able to (it likely will be devalued, and possibly near worthless). Vancouver, and Canadian real estate in general will have price collapses. This will cause Canadian bank failures, and dry up credit in Canada.
Meanwhile, companies with significant exposure in China will see their stock drop. Cash flow will be reduced, and for some, significantly. Assets may have to be marked-down to lower book values.
Further, the companies that depend on the aforementioned firms will endure hardships of product logistics - manufacturing, inventory, and quality control will all go a little haywire.
Firms that can move their supply chains out of China quickly will do so, helping various other countries.
But countries that have significant percentages of their GDP devoted to raw materials production (such as Africa, the Arabian peninsula, Russia, and Australia) will go into recession, and some into depression.
That will result in a drying up of global capital (probably quickly, as bankers run faster than most when they hear canaries chirp), and global shipping.
I could go on, but you get the idea. So much of our lives (wherever we live) depend on supply chains that either run through China, or are significantly affected by China (like concrete and steel), that we are all going to be effected, and economically speaking, it won't be pretty for the world.
What's the best strategy for investing? Asset allocation?
To be specific
Near term: < 6 months Short term: 6 Mos - 2 yrs Midterm: 2 years - 5 yrs Long term: 5 years or more
what you're predicting here is in line with mine, but yours is way more well thought out ... and globally catastrophic.
Where can money be spent right now as an investment?
1. China is converting as much of there funny money Yuan into Gold as possible. This helps bolster the idea that China can pay their debts. https://bloom.bg/2I5TYME
2. China monetary policy is run through banks. When a bank is to far insolvent they will make bad banks and put all of the insolvent loans into those. https://reut.rs/2WvG2zb
3. When China has enough gold to give external investors confidence they can sell off half of their Treasury holdings, create the good / bad banks, and re-engineer the economy. Leaving foreigners on the hook. https://bit.ly/2H7zdxf, https://bit.ly/2vOA1li, https://s.nikkei.com/2WgZRuD
4. The world wants cheap stuff. While foreigners will be unhappy they lost their investments they will keep buying from China and China will have a soft-landing from this upheaval.
5. China won't at that point be able to afford to buy any treasury bonds. The US Treasury will be forced to print money and inflation will go up along with various problems. This will force investors back into China because the US doesn't look like it is any better off then China is. It is a lot like someone who declares bankruptcy being able to get credit again pretty quickly.
6. To make sure productive members of China's society work China could make less productive members into caregivers helping to relieve some societal stress.
7. China's government owns part of a lot of private and public companies along with China Utilities. They can raise money by privatization like France has done. https://on.ft.com/2lN2x1F
#1, China is going to have to buy a lot more gold. They only have about 1/4 as much gold as we do. And if they buy too fast, they'll push up the price, which hurts their currency. Not saying you're wrong, but there are limits here. https://moneyweek.com/499249/how-much-gold-does-china-have-a...
#2 - many ways to deal with this, but it has to be in balance
#3 - I don't understand your - can you elaborate?
#4 - not at the cost of seeing their economies whither up and disappear. An aging demographic curve in most countries is already going to do damage - giving the rest of the country away won't help. We're already seeing increased protectionism around the world in different forms (e.g. the US with tariffs, the EU with regulations, etc.) One example is here: https://www.nwitimes.com/business/local/arcelormittal-idling...
5 - Not all bad things are created equal. Check out this and read the text next to the graph titled, "China Population Growth": http://worldpopulationreview.com/countries/china-population/
6 - this doesn't work with an aging population. The demographic curve hurts (see #5 above)
I first heard this IDENTICAL storyline in 2002. This magical instrument has been shit over the last 20 years. RMB:USD is suspiciously flat by design. Real estate in Canada as mentioned has skyrocketed.
The long term bet you are proposing has failed 4 for 4. Your near term bet has failed 10+ out of 10+.
In other words, they all fail unless you can accurately predict when a drop will occur. Consequently you'd expect that even perfect short plays often fail.
Cash (actual stuff you can hold in your hand, not the plastic stuff) in small denominations. A few thousand in 10's and 20's offers a lot of flexibility to deal with short term issues.
US treasury bills.
Dividend paying stocks, especially ones without a lot of global exposure. Not sure yet, but utilities might be good, but I haven't figured out the impact of interest rates which complicate that problem.
I'm not a fan of gold. It's hard to hold, harder to spend, but if currency valuations fluctuate wildly, a bit might be helpful, but only the stuff you can hold in your hand - a gold fund might not help much, but that's a completely different discussion that I'm not qualified to offer a good opinion on.
One potential domino you left out is what happens if the Chinese economy crashes and they can no longer buy US debt, if this happened and the US had to start inflating their currency it seems like that would be the worst possible scenario, globally speaking
#1 - They only own about 5% of US government debt anyway (about as much as Japan) [0] [1]
#2 - They actually own less than they did a few years ago [1][2]. This tells me that their buying has become somewhat inconsequential already.
[0] - https://www.thebalance.com/who-owns-the-u-s-national-debt-33...
[1] - https://money.cnn.com/2015/04/15/news/economy/japan-china-us...
[2] - https://www.thebalance.com/u-s-debt-to-china-how-much-does-i...
EDIT - I meant to also say thank you!
A lot of Chinese elites are financially inept, and that is not limited to only ones who were born before seventies.
That twisted version of financial "science" was born during China's nineties, out of numerous "get rich quick" schemes, and is now being taught as "the new truth" in reputable Chinese business schools.
The few companies from that era that managed to miraculously survive and turn into more or less normal profitable enterprises were then labelled as "examples to emulate," to disastrous results...
Lenovo (a huge real estate player in China,) HNA, Wanda, Oceanwide-Minsheng, Guotai Junan, Poly, Fosun, Pingan... all built along the same template: ridiculous real estate investments as a collateral for equally ridiculous loans on which the rest of their group companies run.
贺铿, member of the National People's Congress Financial and Economic Affairs Committee, claims not single one of the cities planned to ever repay. Some even struggle to pay interest.
China is the only nation with the financial means (even if it's all funny money as this article implies) to rebuild Venezuela's oil infrastructure that has been massively underfunded to the tune of tens of billions of USD a year for over a decade. The Maduro regime may be desperate enough to sign an agreement similar to the ones China has been offering African nations whereby a loan that will never be repaid is made with the knowledge that China will wind up owning the assets put up as collateral when the country in question eventually fails to meet their obligations.
He talks about wiping out cities, and he's worried about balance sheets. I understand the context around it, but damn. That's cold.
Sometimes I am left in awe at the level of of mental overloading human beings are capable of that leads to statements like that.
I wonder what defaulting on shadow loans means. What kind of protections are borrowers actually afforded? To what extent will shadow lenders try to recuperate their loans?
Do we really have reliable numbers as far as public debt in China AND what the central government has as far as money, and what they could do about it?
Could China now be large enough that they could just ... cancel some debt and tell the world "That's right, we did it, you gonna just not do business in China?"
No one is so big that they can remit their debts and still get low interest loans.
Of course China could raise their taxes to pay for their spending, or they could keep printing money and devalue their currency.
But no one can not pay debt and keep getting low interest rate loans.
If the market has priced in that $30T is on reserve, and you just say, lol nvm -- you get incredibly fast inflation. The market reacts to that $30T not being priced in anymore.
The only thing that's directly attackable by the market is the chinese cny peg/trading range and china controls the convertibility of the currency, they can perfectly legally stop their own citizens from taking money out of the country while protecting their peg with their USD reserves.
Their bonds aren't in foreign hands, so there's nothing liquid to panic sell or short, there's nothing for the markets to directly apply pressure with.
If the currency doesn't fall I don't see where this inflation comes from, cancelling debt essentially owed to a state owned bank just re-starts the credit cycle.
https://www.bloomberg.com/news/articles/2019-02-20/why-china...
Asking for a friend. :-)