[BrianC]

China's Lehman Brothers Moment? (bloomberg.com) 69
Posted by msmash on Tuesday September 21, 2021 @05:40PM from the closer-look dept.
The New York Times:
Angry home buyers are waiting on as many as 1.6 million apartments. Suppliers that sold cement, paint, rebar and copper pipes are owed more than $100 billion in payments. Employees who were strong-armed into lending are panicking now that the company cannot repay them on time. China's Evergrande Group, the embattled property developer whose towering debt has set off panic in global markets, is buckling under the weight of more than $300 billion in debt. The company's billionaire chairman told employees on Tuesday that they would "walk out of darkness as soon as possible." But the question for many is whether the company can stumble out of its current crisis on its own without being led by Beijing. And experts are making increasingly grim predictions about Evergrande's ability to hold on without a government bailout, and the consequences of a possible collapse.
Matt Levine, writing at Bloomberg:
Much of the writing about Evergrande has been about "is this China's Lehman moment?" The main lesson of Lehman was that the collapse of a big levered interconnected firm could cause serious economic damage, and since Lehman, financial regulators in the U.S. and Europe have done a lot of work on reducing leverage and interconnection and damage.

But another lesson, one that I think about a lot around here, is that the way to reduce systemic risk and potential bailouts is for everyone to know how much risk they are taking, for risks to come with clear warnings and accurate labels, and for the risks to be taken by people who can handle them. If you must have big interconnected companies, it is good to know in advance whose claims are senior and safe and who is taking a big gamble in the hope of a high return. It is fine for a company to fund itself by selling speculative investments to retail gamblers, and it is fine for a company to fund itself by selling safe-as-houses investments to retail retirement savers, but either way it is important for people to know which one they're buying.

Much post-Lehman financial regulation is about this sort of labeling: The way to prevent after-the-fact government bailouts is by making sure that risk is borne by people who bear it knowingly and can afford to. When companies fail, people will lose money, and you want to be able to say to whoever loses money, "well, you knew what you were getting into." Here that seems hard! Evergrande got its financing from absolutely everyone -- banks, investors, suppliers, customers, employees -- and it seems unlikely that they all knew what they were getting into. Its capital structure branches out everywhere; there are all sorts of sympathetic people who might lose money, and it is not obvious who should be rescued and who shouldn't be. Do you give the apartments to the people who put their hard-earned money into apartment deposits, or the ones who put their hard-earned money into wealth management products? Eventually either Evergrande will muddle through, or it will get a bailout, or it won't and people will lose money. But the long-term work of making sure this doesn't happen again is mostly about transparency, about allocating risks clearly in advance so you don't have to sort them out in hindsight.

https://www.bloomberg.com/opinion/artic ... m-everyone

[Newfie]

Good post.

I believe another feature of the 2008 crisis was that a lot of the money was from overseas. E.g. Japanese institutions buying into corrupt mortgage lending schemes.

Here ai have no idea how widespread those at risk are.

[Plantagenet]

The Evergrande problem may be worse for China then Lehman was for the US.

chanos-warns-evergrande-crisis-could-be-worse-lehman-china

Evergrande is not unique in China. Just as the Lehman collapse in the USA led to problems for the whole banking sector, a collapse at Evergrande in China may lead to problems for their whole construction industry......and that could wind up being worse for China then Lehman brothers was for the USA.

Complicating things for China is the fact that they are a communist country, and the CCP may actually want to see the Evergrande collapse as a way to lower the price of housing throughout China and build socialism. Already the CCP has attacked China's own tech sector, resulting in a collapse of stock prices there. Its not clear if the CCP is going to bail out Evergrande, or stand back and give it a little push towards collapse in hopes that the socialist utopia will produce something better..


Does the Chinese Communist Party really want its legacy to be that it bailed out the Evergrande corporation?

Cheers!

[careinke]

The Evergrande problem may be worse for China then Lehman was for the US.

chanos-warns-evergrande-crisis-could-be-worse-lehman-china

Evergrande is not unique in China. Just as the Lehman collapse in the USA led to problems for the whole banking sector, a collapse at Evergrande in China may lead to problems for their whole construction industry......and that could wind up being worse for China then Lehman brothers was for the USA.

Complicating things for China is the fact that they are a communist country, and the CCP may actually want to see the Evergrande collapse as a way to lower the price of housing throughout China and build socialism. Already the CCP has attacked China's own tech sector, resulting in a collapse of stock prices there. Its not clear if the CCP is going to bail out Evergrande, or stand back and give it a little push towards collapse in hopes that the socialist utopia will produce something better..


Does the Chinese Communist Party really want its legacy to be that it bailed out the Evergrande corporation?

Cheers!

This will turn out NOT to be a big deal. The Chinese will take care of it, so no contagion to countries outside of China. It was being pushed as FUD so the whales can accumulate.

[vtsnowedin]

I have yet to read a clear explanation of what caused Evergrande's cash flow problem. Was it a Ponsi scheme or other mismanagement or did some source of income dry up?

[Newfie]

VT,

Nor have I. The most comprehensive description I got was that they branched into MANY other enterprises including hotels and hotels electric vehicles. Apparently the EV business tanked, among others.

That makes me lean toward Ponzi.

[AdamB]

That makes me lean toward Ponzi.

ChiCom ponzi schemes! Whomever would have ever thunk that one, back in the days before Nixon visited.

[vtsnowedin]

AdamB:
Do you have a point there or a position?
I can see you are skeptical but in which direction is unclear.

[Plantagenet]

Evergrande just defaulted on its offshore bonds

evergrande-selective-default-offshore-bondholders-run-out-hope-payment

The Lehman Brothers default triggered a financial collapse that took months to work out in the USA.

If Evergrande is going trigger a financial collapse in China, then this default by Evergrande may also mark the start of a process that will take months to work out.


China's Lehman Brothers Moment?

Cheers!

[dirtyharry]

China just declared all crypto illegal . Is it a preemptive action to prevent capital flight because of the Evergrande fiasco ?
https://apnews.com/article/business-tec ... e105d602e6

[AdamB]

AdamB:
Do you have a point there or a position?
I can see you are skeptical but in which direction is unclear.

I think I have a point. That within a communist system, it is amusing to think that what a major economic actor is doing, or what outcome they arrive at, has anything to do with free market principles.

As a large example, the decision made by the state can then be applied to guide/instruct/force others to pay better attention to keeping their own houses in order. All doing exactly as the ChiCom leadership instructs.

Unlike unbridled greed, combined with laws that usually generate expected consequences for the evil doers in a more free market economy, it behooves all of us to not forget that pretending to run a free market state inside a communist state is just that...pretending.

[adonis]

money printing from the fed is holding back collapse all hail the mighty fed

[vtsnowedin]

I think I have a point. That within a communist system, it is amusing to think that what a major economic actor is doing, or what outcome they arrive at, has anything to do with free market principles. ......

.

I agree with you on that. I would not buy any stock based in China (I have one in Taiwan that also worries me) and I would like to see the US companies that have exposure in China in the form of factories etc. withdraw with as much of their intellectual property as possible intact.
Even my simple farm tractor was assembled in India using axle castings cast in China.
It is one thing to have trade relationships with allies or good country neighbors. The hydraulic systems on that tractor were made in Italy but Italy is not trying to overcome us. China on the other hand wants to grind us to dust.
We must act accordingly.

[Outcast_Searcher]

AdamB:
Do you have a point there or a position?
I can see you are skeptical but in which direction is unclear.

I think I have a point. That within a communist system, it is amusing to think that what a major economic actor is doing, or what outcome they arrive at, has anything to do with free market principles.

As a large example, the decision made by the state can then be applied to guide/instruct/force others to pay better attention to keeping their own houses in order. All doing exactly as the ChiCom leadership instructs.

Unlike unbridled greed, combined with laws that usually generate expected consequences for the evil doers in a more free market economy, it behooves all of us to not forget that pretending to run a free market state inside a communist state is just that...pretending.

And yet, China seems to have enough cash to deal with its issues over time without piling up seemingly infinite debt. Re the US -- that remains to be seen -- hopefully I'm dead before the "big one" hits, re the US defaulting or the world losing major confidence we can ever pay the debt. (Inflation might bail us out, yet again. That's totally SCREWING the lenders, of course).

NOT saying "communism good". But NOT saluting the American flag and pretending "free markets all good", given the number of massive mistakes and amount of corruption in the first world systems either. Great Britain is supposedly capitalist. Was Brexit a good thing as the economic chaos continues to unfold?

I think there's PLENTY of corruption and incompetence in ANY very large economic system.

[AdamB]

I think there's PLENTY of corruption and incompetence in ANY very large economic system.

Sure. The main difference being that in a mostly free market system (of which there are fewer and fewer around the world nowadays), bad actors can get caught, are fined, jailed, barred from practicing law, whatever.

With the ChiComs, a head ChiCom will decide what the punishment should be before guilt is demonstrated (if there is even any guilt involved), and who it should be inflicted upon.

[Outcast_Searcher]

I think there's PLENTY of corruption and incompetence in ANY very large economic system.

Sure. The main difference being that in a mostly free market system (of which there are fewer and fewer around the world nowadays), bad actors can get caught, are fined, jailed, barred from practicing law, whatever.

With the ChiComs, a head ChiCom will decide what the punishment should be before guilt is demonstrated (if there is even any guilt involved), and who it should be inflicted upon.

In theory, yes. But how about in reality?

What proportion of the banking clowns, rating agency clowns missing everything, etc. were fined or jailed for the great recession debacle?

I get very close to zero. All the clowns claim "I couldn't help it" and "We didn't know". (Shades of "Atlas Shrugged", BTW).

So at the end of the day, if the fraudsters, clowns, etc. don't get punished, but manage to screw up both systems, I'm not convinced either system gets a gold star vs. the other, re overall finances.

But hey, that's just me.

[vtsnowedin]

Outcast_Searcher"

I'm not convinced either system gets a gold star vs. the other, re overall finances.

I beg to differ. The results in economic growth speak for themselves. You never see lines of people climbing over fences trying to get into dictatorships or communist countries.

[Newfie]

Out.

Re the US -- that remains to be seen -- hopefully I'm dead before the "big one" hits,

I understand your thoughts but would rephrase that sentiment to something like….

“I hope the “big one” hits after I have squeezed all the juice from my orange of life”

Just saying, be careful of what you wish for. LOL

[evilgenius]

You know, so many ordinary Chinese people go about trying to make their lives better with the help of what could only be called loan sharks. The end result of this crisis could be that more Chinese become involved in their banking system. There might finally be a way they can see through to get there from here.

[EnergyUnlimited]

300 * 10^9 USD?
For China these are peanuts.
That is like if every Chinese citizen lost about 200 USD.
Not a great deal.