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Comment by throwaway2037 | Hacker News Reader

throwaway2037

    Some of these companies have trillions in RMB on their balance sheets.

I don't understand this sentence. It is nonsensical to use balance in this way. You wrote "trillions in RMB". Let's assume (your hand-wavy use of the term) balance sheet means: outstanding debt. Further, each 1T RMB is 137B USD. How many companies in the whole world carry more than this much debt? Let alone Chine property developers? Wildly overstated.

Also, central bank's can print money, by definition. They can also buy debt issued by these companies to repay maturing debt. Then they can forgive this debt. Why would this harm "the assets of the middle and lower class"? The misunderstanding of monetary theory appears weak here.

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From a quick google Evergrande (officially) has 2.4 trillion Yuan in debt, and 1.7 trillion Yuan in assets. Assets seem to have lost more than 20% of their value since 2019.

It is the largest one of the Chinese real estate developers, but there are a couple others that might break through the 1T Yuan mark.

That is 90 billion USD shortfall. Assuming lenders will have to take some haircut the no. is big but not something that will break the economy!! am I missing some nos.?

The lenders in the Chinese housing market are mostly Chinese citizens. In modern China, rather than buying a house, you buy a promise of a house, then the house builder builds it for you. The house builders though have these huge debts, and they've been using money from new purchases to construct their backlog of homes.

The $90bn outstanding is $90bn in outstanding housing construction, not just abstract debts to banks which could be written off or bailed out. Citizens will need to continue paying their mortgages on houses that don't (and won't) exist, which will cause some civil disquiet. Construction companies are going to have a shortfall of $90bn worth of work in their pipelines, which will mean mass layoffs. Entire large towns will go unbuilt.

Evergrande isn't the only one in this situation, it looks like a handful of large house-builders also have these uncompleted backlogs being paid for with new orders. The collapse of one might prompt the collapse of the others. As house-buyers become less confident that their house will ever exist, they'll stop buying new stock. When they stop buying new stock, the other house-builders collapse under the burden of their backlog of construction projects.

That sounds suspiciously like a pyramid scheme: the only thing financing the current construction are payments to new construction. How did they get into this situation? By continuously selling under cost, or perhaps by siphoning off profits?

The way OP described it, yes, it sounds like a ponzi, but in reality it's more like crowdfunding. First, the developer takes credit from a bank and uses own money to buy a land. Then, in order to start construction, the developer sells what is basically an obligation to build real estate and transfer the rights to buyer. These obligations are obviously cheaper than the expected price of real estate in the future, and also cheaper than already-constructed real estate now. The developer does not sell all the future real estate at once, because as the time goes by, and construction comes closer to a finish, the obligations become more expensive - it sells only the amount necessary to fund the next step of construction. After the construction is finished, developer sells leftover real estate with a markup big enough to finance its next project.

When the housing market is good, this scheme brings real estate costs down, because you can buy cheaper "not-yet-build" flats or houses, and the developer can seek funding without overpaying on the bank loans. But if the housing market tanks, the development freezes, and the first buyers take a loss. I don't know about China, but in some countries such obligations are mandatory insured from the default, so people can get at least some of their money back. In others buyers are left with a piece of land with unfinished building.

Land price keeps increasing caused this problem. You can just imagine land price to increase 50% YoY (hypothetical number) and you will understand the situation.

Basically you can not have enough cash on hand to purchase the next piece of land for your development, but you want to always plan for the next step.

The first time it happens, you can call it a mistake. But second, third? Is int't it obvious that, seeing this trend, you should calculate the risk and factor in the land cost increase when pricing your offer?

Try doing that and someone who does take the leverage will simply outbid you for the land.

It's a different issue than what you are imaging. It's not that they sell the property for less than the relevant land cost, it's that the increase is too steep that they can't buy and build the next one without pre-selling the lot, the company just doesn't have enough cash.

The magnitude of land speculation profits is not dictated by physics. If companies weren't able to pay what they did, the speculators (local governments in this case?) would live with less.

Developers compete with each other, so they will always take as much leverage as allowed, but the rules are adjustable by lenders. Lenders compete too, but they usually wind up backed by a central bank or other political entity, and that's the point at which changes can actually be made. Of course, there is no guarantee these changes won't create problems (Three Red Lines were a decade too late) but they can be made.

This sounds ponzi schemic.

That’s because it is.

China lacks a safe financial system that the ordinary person can invest in, the way that an American can park funds in an index fund and expect a reasonable rate of return. (The Shanghai and Hong Kong indices are not as healthy as the general economy.) It also lacks generous pension schemes like those in Europe. So part of the reason this is so bad is because most Chinese citizens put their nest eggs in real estate, and now the bubble has popped.

If you think the S&P500 and NASDAQ in recent years merely gives a "reasonable rate of return" you'll realize that there really aren't any other economies with a "safe financial system". Most markets don't have that level of growth.

The Chinese predisposition to invest in real property is much more cultural (and irrational) than what you suggest. The Chinese stock market is actually much more rational in this regard as for quite a while you could buy Chinese real estate stocks with pennies on the dollar, price to book ratios much less than one. Traders know the real estate bubble is going to burst sooner or later and the stock market priced this in. The real estate market which mostly consists of individual buyers didn't quite get the memo until recently.

Speaking personally, in Chinese circles, the social pressure buy an expensive apartment is honestly overwhelming, and it's not because people knew that the property market was a good investment, it was just something they thought a respectable person should do once they earned some money. Family members without any financial literacy kept thinking I was an idiot for holding FAANG stocks instead of buying an apartment. AFAICT I'm the only person in my social circle (including people who should have known better) that has avoided the recent property slump (in Hong Kong) by steadfastly refusing to enter the property market at its height a couple years ago. It's nice to not have people nagging me about it now.

I don't disagree with any of that. Most of the other developed countries though have some kind of government or corporate (in the case of Japan) safety net that China lacks. The only example that I'm aware of that lacks either is South Korea, which has extremely high elder poverty rates compared to OECD peers.

I guess the word I was looking for to describe the Chinese financial system is 'immature.' It is unfortunately not uncommon for some Chinese firm to get delisted for accounting fraud or some other type of impropriety, so investing in the indexes is a worse idea than it is in many other countries. And then there's all the marketing of dubious financial products that people inevitably lose their savings on and protest; before people swarming the Evergrande HQ demanding their money it was P2P lending and many other scams.

One is that apparently a bunch of suppliers and contractors for their projects have not been paid for a while, so those will default or go bankrupt as well, and cascade further down the economy.

The other thing is that Evergrande sold mostly through presales so now there are all those paid for but unfinished apartment blocks.

> .. and 1.7 trillion Yuan in assets

Note that this is the book value. Probably based on some valuation from years ago and only minimally adjusted, mean while property prices have crashed.

Moral hazard and inflation. If I know that I will be bailed out with a certain probability, then my actual cost of capital is much lower (since I am not expected to pay the entire volume of interest.)

For instance: why not make the investors whole again instead by giving them the "printed money" instead of going through the middle-man of propping up these failed giants?

In the US sure, where its blasphemous to slit the throats of the leisure classes for their excesses. In China they made Jack Ma disappear.

Through out history when it gets time for the Kings & Queens to waive the debt of the plebs away, cause they have nothing left to pay, the Rentier classes take the haircut.

In the US the rentiers have owned the Kings & Queens for a long time. To the point where any American institution cant touch them. This is not the case in China. There will be mass disappearances and cullings (already have been).

Jack Ma disappeared because he openly criticized the government.

The "leisure class" (of which many party members are part of) operate with impunity as long as they stay in the good graces of the party leadership.

You will only hear what the CCP wants you to hear. The rest of the "leisure class" flies under the radar.

The ‘Jack Ma’s that are aligned with Xi have their corruption protected. It’s still politics.

Well, start with the first 10, then remaining ones will emigrate and simply assign bounty for any head of CCP member based on the rank - until the Party is eliminated. How about that? Don't underestimate the money - it goes the long way.

> then remaining ones will emigrate and simply assign bounty for any head of CCP member based on the rank

This is a fantasy.

You think Jack Ma didnt try that?

Still, human history shows us that money always wins. People have natural instinct to acquire wealth. No political regime has remained viable for a long time if it tried to go against this instinct. Authoritarianism works fine; in fact i am even in a bit of doubt about democracy being the better social order, in any case our empirical data to confirm that is insufficient - but even authoritarian society should exploit, rather that try to suppress, this basic motivator of the people.

So far we can't see CCP making this mistake - which sort of confirms that Party has a healthy self-preservation instinct. Let's say, they are trying to do everything to avoid collapse of real estate prices because that will hit retirement savings of too many people, and they seem to accept lower rates of economic growth if that will be necessary to achieve that.

> Still, human history shows us that money always wins.

Human history has shown us that whomever controls the army usually wins.

Still, you need money to control the army and keep it interested. Then there comes a choice of either being unable to do it because of not raising enough cash from society to make a sufficiently big army to keep population in check, being able to have better income they can have in civilian life; or doing it and ruining the competitiveness of the overall economy - like the good old Soviet Union.

Now, in the post-industrial era, we have a third threat. Extinction. And China may actually combine all three.

Money is the force of reason, ignoring it comes at one's own peril regardless of the force one controls: it means going against common sense that established itself through the power of competition, in favour of some arbitrary political theory or just someone's wits. Even if it succeeds for a while, it always reduces overall quality of the system and increases it's vulnerability.

> Still, you need money to control the army and keep it interested.

Making payroll is never an issue for a sovereign that controls a central bank that controls their own currency. You're completely missing the point, because you're thinking in terms of money. A country isn't a business, or a household, it doesn't budget in the way you think.

> Money is the force of reason, ignoring it comes at one's own peril regardless of the force one controls:

Money is a floating-value paper proxy for material wealth. When there's a shortage of material prosperity - when people aren't building stuff, that's when you get a problem. Your position has just as many ideological blinders on as the one you think you are making arguments against.

The USSR collapsed because it failed to provide material prosperity. China, by any metric you could measure, is wildly succeeding at providing that material prosperity. That is what the party is focused on, because that's what's going to keep them in power.

For counterexamples of the primacy of money, see also: North Korea, Iran, Russia, Pakistan.

You have to have bases of power, who are compensated and secured.

It's less stable, but doable with the right mix of alternatives, to ignore "the people" as one of those bases of power.

Idk how you can include any of those but North Korea in the list (North Korea only exists because China secures it). Russia at least, is a good example of the opposite: give people chance to earn and invest money and enrich themselves and they will give no shit about even the most ridiculous things government does.

Soviet Union has collapsed while having whole lot more economic power and raw output of just about every industry, and was much more up to date technologically, but it deprived people of their basic instinct: to save and invest money and grow rich. Today's Russia allows and encourages that. Moreover, it even allows people say, to blatantly ignore taxes on all levels (i know people who make millions bucks per year in Russia and they don't know what tax number is, receiving and spending money through the banks in the open - and banks even help then when they need to make that money look legit abroad). As long as you don't try to oppose the great Pu or mess with politics overall, the regime has nothing against people enriching themselves - so the support base is rock solid and need for violence to maintain internal order is next to nonexistent.

Russia isn't democratic, but it is capitalist in the sense: you can own capital and government wants you to, and sees people who have capital as by default more well-behaved and loyal than those who don't. The sickest shit Putin may say on TV is shrugged by those people as "Pu just wants to make those peasants happy", and they may be even right.

> Soviet Union has collapsed while having whole lot more economic power and raw output of just about every industry, and was much more up to date technologically, but it deprived people of their basic instinct: to save and invest money and grow rich.

The Soviet Union pissed half of its economy away into its military, and the other half into its particular brand of waste, inefficiency, and corruption. It had a shortage of housing, basic consumer goods, and appliances - a shortage of material wealth, which became untenable by the time the fourth post-war decade rolled around, and everyone started wondering why the country has 12,000 nuclear warheads, but is still so goddamn poor.

If material wealth weren't the problem, or if Gorbachev didn't decide to stop imprisoning people for complaining about it, it would still be around today.

The world's three meals away from anarchy, if there were serious material shortages in the US today, nobody would give a crap about what monetary policy it follows, or whether or not you can save. King Bread is a ruler you swear fealty to, compared to him, King Dollar is something that comfortable philosophers build elaborate arguments for and temples to.

Or as someone wryly observed: most French revolutions started when Paris ran out of bread.

Those are all countries in which I'd hazard a free and open election, without a thumb on the scales and voted in by all citizens, would topple their governments.

Your description of Russia seems accurate, ~1995 to ~2010.

However, policies appear to be changing into tighter, more direct state control of oligarchs, in an effort to ensure civil stability.

Additionally, Putin is now 70... which is getting to the age that more laissez faire dictators turn increasingly autocratic in response to any external disturbances of their social control.

At some age and tiredness, it seems like the blunt approach trumps finessing a solution between multiple competing interests.

And... not to put too fine a point on it, but Putin did just survive a coup attempt, which wouldn't have launched if there weren't some support for it among the myriad power brokers in Russia.

I don't mean oligarchs. I mean everyday men and women. People don't want to be politically active because they know that Putin allows and wants them to acquire wealth (and even has no problem with them exporting that wealth abroad); and they also know that the masses don't want them to be allowed that, and if Putin is out, most probably masses will have it their way.

Everyday men and women, which I take to mean middle class, aren't a threat or power base in modern Russia.

They don't have voting power.

They don't have demonstration power.

They don't have access to broadcast their free speech via mass media.

Short of outright rioting, there's little they can do that matters to the Russian government.

Which means than in a trade-off between {what the people want} and {what those with power want}, the people are going to be ignored.

> (and even has no problem with them exporting that wealth abroad)

"...discuss reintroducing some capital controls to help prop up the struggling rouble."

https://www.theguardian.com/business/2023/aug/16/putin-meeti...

Ironically, today the idea of reintroducing capital controls was rejected, officially, "because it was obvious that people will quickly find ways around it anyway". Simply put, there is no need to further increase already terrible level of corruption by introducing another useless but corruption-inducing regulation.

> Still, human history shows us that money always wins.

Are you aware of what happened to the landlords in China or do you mean the landlords weren't human?

It only shows us that current Chinese regime is a civilisational dead end. Also, by that point, they didn't have the money. China was overpopulated and did not have marginal income to pay them, and the productivity was overall too low. No one in China had money, so force ruled.

> It only shows us that current Chinese regime is a civilisational dead end.

Creating an all-encompassing historical 'rule' like 'money always wins' and then discounting evidence of a blatant counter-example is not generally a method that ends in good outcomes.

See: all major failed political movements based on an ideology that refused to adapt to conditions that did not line up with its dogma.

>until the Party is eliminated

The party has 98 million members

The Soviet Communist Party also had millions of members, but we all know how that ended - hardly with a bang and a whimper.

Folks join not for ideology but for the social standing and future career prospects - you not going to be a senior bureaucrat or military officer if you ain't a member.

You definitely won't see anything like this in the US: https://www.businessinsider.com/china-tells-evergrande-found...

Like in 2008, bankers made a killing selling toxic products and socialized all the losses when everything came crashing down.

Actually it's the US government that made a killing with TARP loans and acquisitions.

Bankers lost their shirts in the whole thing - having to pay interest on those TARP loans or had to sell their shares to the government to get capital to survive.

List of banks acquired or bankrupted during the Great Recession

https://en.m.wikipedia.org/wiki/List_of_banks_acquired_or_ba...

If you have trillions on the balance sheet, then you have trillions in assets, funded by either debt or equity. In this case clearly debt.

It is confusing why you say “use balance this way” because it is a “balance sheet”. You can’t pull the word balance out individually.

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