Comment by jpgvm | Hacker News Reader

Comment by jpgvm | Hacker News Reader

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Same story has been foretold over and over for the last 30 years.

I will believe it when I see it.

The RE bubble is bad but substantially less bad than what the US was facing in 2008. There is a big difference between over-leveraged developers (the Chinese problem) and rotten Main street banks (which was the US problem).

In China's case we are likely going to see a continued drop in housing prices for a little bit longer until they plateau. However they are unlikely to see growth again for a long time unless Chinese government changes tact. This isn't a bad thing as right now Chinese homes are some of the most unaffordable on the planet, especially in desirable cities. Also it will lead to speculation and investment moving outside of RE and into other vehicles like equities which will improve the breadth and quality of Chinese financial markets. The other bad things that will happen is construction companies will likely be in distress, large infrastructure projects/spending directed by the CCP will save the good ones but there will be a bunch of consolidation and downsizing. Not a particularly bad thing given the changing population dynamics probably requiring the construction of less housing than previously. Impact is unlikely to spread beyond RE because of how compartmentalized funding is in China. The government controls all the major banks and as a result they run under very low-risk capital regimes. It's much more likely the big financial fallout will be from foreign investors that were greedily holding onto risky Chinese commercial paper.

All-in-all I actually suspect this to go out with a whimper rather than a bang. The way systems are setup in China there just isn't really the potential for a bang outside of like big social issues causing a revolution or something but generally speaking that doesn't happen. Usually as dissent grows they recognize it won't go away and start doing something to appease the people. Recent example being their effort to deal with pollution in the major cities, etc.

So yeah. I get that Western folks, Americans in particular don't understand the Chinese system and wish ill will upon it but the reality is that it's a lot more robust than said folks give it credit so don't bet on it failing anytime soon.

Right so I had similar vein of thoughts years ago when I thought China was in a real estate bubble and did think that the government can just make certain type of investors take the loss and move on. However, that's only if the collapse is only in real estate. What I'm seeing right now with China is a death spiral, namely

bad policies such as zero covid, tech crackdown, or not resolving the root of real estate crisis -> investor (domestic and foreign) loss of confidence -> companies leaving or shut down -> rising unemployment or reduced salary -> debt bubble gets bigger -> bad policies.

This death spiral is enhanced by demographics collapse which is happening now, not 30 or 15 or 10 years ago, as well as nationalistic behaviors that isolates China. Not to mention global inflation and consumer demand collapse.

In my list of things I also didn't mention

* 20% unemployment rate for new grads

* layoffs from big tech companies

* 70% of China's economy is real estate related, which means China will take an even bigger impact from real estate collapse than other countries that have less % of economy in real estate.

* collapse in demand for real estate due to fast aging population

* 20% of built real estate stays empty (not even rented) due to investment vehicles purpose

How are over-leveraged developers that different from what caused the 2008 global financial crisis? The cause of the GFC was that assets were labeled as safe but were in fact unsafe. So one day everyone woke up and had less money than they thought they had. The same thing can happen from over-leveraged developers. Banks lend money to people to buy real-estate. Everyone expects those units to exist, and if they suddenly don't exist en-masse, then that's going to be a major shock.

It matters because of contagion. As it stands there are individuals at risk of being over-leveraged by having a loan on a asset that doesn't currently exist (but probably will, CCP has a way of compelling such things to happen) or has dropped in value compared to when they bought it (most likely). Developers and construction companies are also in hot water as their business models relied on continually pre-selling apartments to provide liquidity for their operations. This is where the similarities end vs 2008.

The main issue with 2008 wasn't the housing bubble itself, such bubbles are normal and happen all the time. The issue was the extent of the financial over-leveraging (due to deregulation) by the financial firms which threatened the solvency of Main st and Wall st banks alike and the incentives that came out of the synthetic financial products that were engineered over baskets of mortgages. Namely a reduction in qualification for sub-prime loans and increased incentives to offer variable rate mortgages with cliff clauses + continual refinancing + speculation + flipping etc.

Essentially normal people losing their house == expected (though sad still) and would have caused a moderate recession (again, expected). However because of how overleveraged the banks themselves were they collapsed, this spread (contagion) to pension funds, equities, everywhere essentially and because these assets and positions in the funds and banks were held across the world it resulted in the -global- financial crisis rather than a contained RE bubble popping.

Yeah, dude, the number of 'normal people losing their homes' will create a revolution, and/or, consumer spending will crash, combined with the fact that a 'major component of GDP has crashed' (i.e. construction), that's 'extremely bad'.

The US was able to 'rebalance' by propping up some banks - but in reality they saved 'consumers' by taking toxic loan assets of banks balance sheet and absorbing it onto the fed balance sheet.

CCP can't really do that for houses that are not built.

The other issue is the size of that part of the economy in relative terms.

This is is not going to 'blow over' - everything, including Xi's totalitarian takeover, increased control and repression, issue of age, diminishing marginal returns to growth ...

... this adds up to a 'major shift' in what China is. We saw a different China in the 1990s (quietly building), 2000's (onto the world stage), 2010 trying to be a global superpower, threatening Taiwan, occupying S. China Sea etc, and now 2020's 'reckoning /rebalancing'.

> taking toxic loan assets of banks balance sheet and absorbing it onto the fed balance sheet

This is not what happened. (The Fed never bought the toxic assets. It bought Treasuries and super-safe nontraditional assets off owners of toxic assets so they had the liquidity to resolve themselves. But the toxic stuff ended up in other places.)

No, the Central Banks give banks cash in return for garbage mortgages.

Look at the giant bump in 2008 in Fed assets. Most of that is mortgages.

And then in 2019 an even bigger calamity.

Those massive jumps represent the finantialization of the USA, a massive form of economic shift.

[1] https://wallstreetonparade.com/2022/06/fed-data-shows-a-half...

> Central Banks give banks cash in return for garbage mortgages

There are zero mortgages on the Fed’s balance sheet. There has never been a mortgage on its balance sheet. If you think the Fed bought whole mortgages off banks for keepsies, or lost a single cent on its bailouts, you’ve missed something.

Is this a joke? The Fed has almost 3 trillion of mortgages on its books. Source (from the Fed itself): https://fred.stlouisfed.org/series/WSHOMCB

> Fed has almost 3 trillion of mortgages on its books

“Mortgage-backed obligations held by Federal Reserve Banks…guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae” [1]. Not mortgages. It’s a subtle difference. But a big one, given the top tranches of mortgage-backed securities never faced a solvency (versus a liquidity) problem.

[1] https://fred.stlouisfed.org/series/WSHOMCB

There is literally 0 functional difference. Fannie Mae and Freddie Mac are government sponsored entities. They buy conforming mortgages from banks, package them up into a mortgage-backed securities, and then sell them on the open market. The Fed buys these. So your claim that the Fed doesn’t buy mortgages because “ackshually Fannie Mae buys the mortgage” doesn’t hold much water. And in fact, the only real reason Fannie Mae can guarantee mortgages is because ultimately the Fed can step in to buy any distressed assets.

> literally 0 functional difference. Fannie Mae and Freddie Mac are government sponsored entities

Fed means Federal Reserve. Not the federal government. The Fed and federal government are meaningfully different.

The Fed is 'Governance'. It's just not democratic and didn't arrive into it's current situation the way we would have liked it.

It acts in essentially the same manner as 'Bank of England' or the 'ECB' just structured a bit differently.

The Fed's massive intervention in 2008 was similar to other Central Banks, because it's effectively the same thing i.e. 'governance'.

The Fed's intervention to 'buy mortgages' is not a 'market response' - it's a 'government response'.

The intervention was mostly related to buying mortgages (however they ares structured is secondary) and is de-facto a bailout of Home Owners, who, if they were subject to normal market conditions, would have faced massive foreclosures, and, would have destroyed home prices for everyone else, furthering the calamity.

That the mortgages on the Fed's Balance sheet were not 'the worst' of the assets is a bit of a side show - in 'current market terms' they were all toxic we know that because nobody wanted to buy them, which is why the Fed had to do a 'non market intervention'.

If they were not basically 'garbage' at the time, the Fed would not have had to intervene to buy them.

As a result, the Fed hold's a giant pile of 'mortgages'.

This comment is a good example of why popularly-controlled central banks fail within a generation. The lack of understanding is understandable. The insistence on doubling down on it is not.

Mortgage backed securities are mortgages.

> Mortgage backed securities are mortgages

In the way Sudafed is meth. Agency MBS’s never faced solvency questions. Unrated mortgage-backed securities and whole mortgages did. You are argued the Fed bought toxic crap off banks. It didn’t. It bought the cream of the crop, giving banks liquidity with which to address the rest.

The difference between mortgages and agency MBSs is entry-level finance. You don’t need to know it. But you should understand your circles of competence well enough to know not to debate it.

As I said, I will believe it when I see it. Heard the same doomsday stories over and over at this point.

The most likely way this plays out is CCP slowly nationalizes Evergrande and other embattled developers (bond holders and equity investors 100% screwed), sell the unfinished projects to developers that didn't run themselves into the ground for them to be completed. This is already happening.

As much as people want to believe there will be collapse I just see it as incredibly unlikely given both track record and the iron grip that CCP has over the Chinese state banks. Without a failure in the banking sector I just don't see significant enough contagion to cause long-term damage.

> CCP can't really do that for houses that are not built.

Assuming there was political will, there's no reason the CCP couldn't do that for houses not yet built. By definition toxic debt is larger than whatever the collateral is.

This doesn't answer the question. China also sells mortgage backed securities and has parts of its financial sector operating with little regulation. Something like 40% of outstanding Chinese loans are tied up in shadow banking activities. It's entirely possible that a failure to pay mortgages leads to contagion, especially because the mortgages aren't even backed by anything in many cases. In some ways, we're already seeing contagion. A lot of these developers are folding due to new regulations on how much debt developers can take on.

It does answer the question you just want to look past it. Chinese state-owned commercial banks (SCOBs) account for ~40% of the market alone, another 40% or so is rural banks etc, all of which are under incredibly strict regulation. You can't compare the state of US banking in 2008 to what we currently see in China, they aren't even remotely close in terms of regulation, capital requirements and auditing. Current day US banks probably have less stringent stress tests than SBOCs.

Shadow banking and privatized loans are definitely a risk but they don't represent the same scale of risk as we saw in 2008. It's almost certain they explode but I don't think it's possible that such a small portion of the market can markedly affect the financial stability of the nation as a whole.

> 40% or so is rural banks etc

Aren’t those the banks that were taken over by gangs and has their funds embezzled? You’re painting way too rosy a picture of the Chinese financial system. It’s taken months to make rural depositors while after having their money stolen. They’re still waiting.

~300/4400 banks represening ~1% (I think 500B USD worth) of total PRC banking assets fell within the high risk category according to PBOC audit last year. Which included the rural banks running the high interest scam by gangs hence the April crack down. For reference the 24 major banks hold 70% of assets. Interestingly these stats were released in PBOC Q1 press briefing in mid April that seems to coincide with hammer falling on these banks. It's a hit on small rural bank reputation, but it's not catastrophic. Shouldn't be surprise it will take months to untangle mess and determine whether / who should be compensated by national bank insurance scheme for non-compliant transactions from obvious scam (10% interest). So far they've settled to compensate clients with 50k rmb or less on Monday to spare small time dummies who got scammed. Questionable if larger depositers will, or should be compensated.

Do the big state-owned banks not have any exposure to high-risk banks or real estate developers?

Nothing significant no. Ping An had some exposure but it's already written down - they are also not a bank, they are an insurrance firm but worth mentioning as they were the highest profile entity with exposure. That doesn't mean zero of course, they are still taking a haircut on whatever assets they do hold but at a % of assets it's not significant, also they are likely to get preferential treatment when it comes to servicing debt as domestic bond holders.

Because of their horrendous credit ratings developers actually had a huge amount of trouble sourcing capital locally and were forced to sell junk bonds on the international market at elevated yields. This means a few things, firstly that everyone acknowledged the risks (hence the high yield) but also that the impact of the RE market slowdown is devastating on these over-leveraged developers because of their very high cost of debt.

The fact that the assets were always junk rated is partially why this is way less of a big problem than people are trying to make it out to be. In 2008 the problem was the assets were AAA rated (the exact opposite of junk) and thus were held in enormous quantities by large banks and funds all around the world. Conversely because of the risk these assets posed they are held rather narrowly in comparison and those that do hold them knew and were sophisticated enough to accept the risks.

> How are over-leveraged developers that different from what caused the 2008 global financial crisis? The cause of the GFC was that assets were labeled as safe but were in fact unsafe.

US (and Western Europe) loans backed by residential real estate were considered "safe" by the world. Loans in China that outside parties need to work backchannels to be allowed to get into will never be considered that safe.

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